Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks

Stephen E. Morris, Hyun Song Shin

Research output: Contribution to journalArticlepeer-review

535 Scopus citations

Abstract

Even though self-fulfilling currency attacks lead to multiple equilibria when fundamentals are common knowledge, we demonstrate the uniqueness of equilibrium when speculators face a small amount of noise in their signals about the fundamentals. This unique equilibrium depends not only on the fundamentals, but also on financial variables, such as the quantity of hot money in circulation and the costs of speculative trading. In contrast to multiple equilibrium models, our model allows analysis of policy proposals directed at curtailing currency attacks.

Original languageEnglish (US)
Pages (from-to)587-597
Number of pages11
JournalAmerican Economic Review
Volume88
Issue number3
StatePublished - Jun 1 1998

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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