Journal of Political Economy Vol. 114 No. 3 2006
Signaling in a Global Game: Coordination and Policy Traps
Abstract
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.
- DOI
- 10.1086/504901
- Volume
- 114
- Issue
- 3
- Pages
- 452-484
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref