American Economic Review: Vol. 96 No. 5 (December 2006)
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Self-Fulfilling Currency Crises: The Role of Interest Rates
Hellwig, Christian, Arijit Mukherji, and Aleh Tsyvinski. 2006. "Self-Fulfilling Currency Crises: The Role of Interest Rates." American Economic Review, 96(5): 1769-1787.
We develop a model of currency crises, in which traders are heterogeneously informed, and interest rates are endogenously determined in a noisy rational expectations equilibrium. In our model, multiple equilibria result from distinct roles an interest rate plays in determining domestic asset market allocations and the devaluation outcome. Except for special cases, this finding is not affected by the introduction of noisy private signals. We conclude that the global games results on equilibrium uniqueness do not apply to market-based models of currency crises. (JEL D84, E43, F32)
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