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.

This paper introduces signaling in a global game so as to examine the informational role of policy in coordination environments such as currency crises and bank runs. While exogenous asymmetric information has been shown to select a unique equilibrium, we show that the endogenous information generated by policy interventions leads to multiple equilibria. The policy maker is thus trapped into a position in which self-fulfilling expectations dictate not only the coordination outcome but also the optimal policy. This result does not rely on the freedom to choose out-of-equilibrium beliefs, nor on the policy being a public signal; it may obtain even if the policy is observed with idiosyncratic noise.