Discrete Devaluations and Multiple Equilibria in a First Generation Model of Currency Crises

38 Pages Posted: 27 Dec 2006

See all articles by Fernando Broner

Fernando Broner

CREI; Barcelona GSE; Universitat Pompeu Fabra; CEPR

Multiple version iconThere are 2 versions of this paper

Date Written: October 2006

Abstract

The first generation models of currency crises have often been criticized because they predict that, in the absence of very large triggering shocks, currency attacks should be predictable and lead to small devaluations. This paper shows that these features of first generation models are not robust to the inclusion of private information. In particular, this paper analyzes a generalization of the Krugman-Flood-Garber (KFG) model, which relaxes the assumption that all consumers are perfectly informed about the level of fundamentals. In this environment, the KFG equilibrium of zero devaluation is only one of many possible equilibria. In all the other equilibria, the lack of perfect information delays the attack on the currency past the point at which the shadow exchange rate equals the peg, giving rise to unpredictable and discrete devaluations.

Keywords: Currency crises, first generation models, private information, discrete devaluations, multiple equilibria

JEL Classification: D8, E58, F31, F32

Suggested Citation

Broner, Fernando, Discrete Devaluations and Multiple Equilibria in a First Generation Model of Currency Crises (October 2006). CEPR Discussion Paper No. 5876, Available at SSRN: https://ssrn.com/abstract=953823

Fernando Broner (Contact Author)

CREI ( email )

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+34 93 542 2601 (Phone)

HOME PAGE: http://www.crei.cat/people/broner

Barcelona GSE

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Barcelona, 08005
Spain
+34 93 542 2601 (Phone)

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain
+34 93 542 2601 (Phone)

HOME PAGE: http://www.crei.cat/people/broner

CEPR ( email )

London
United Kingdom
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