American Economic Review Vol. 96 No. 5 2006

Self-Fulfilling Currency Crises: The Role of Interest Rates

Christian Hellwig¹; Arijit Mukherji²; Aleh Tsyvinski³

¹ Department of Economics, University of California, Los Angeles, CA 90095. · ² University of Minnesota · ³ Department of Economics, Harvard University, Cambridge, MA 02138.

Abstract

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.

DOI

10.1257/aer.96.5.1769

Volume

96

Issue

5

Pages

1769-1787

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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