Journal Article

Learning and Complementarities in Speculative Attacks

Itay Goldstein, Emre Ozdenoren and Kathy Yuan

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 78, issue 1, pages 263-292
Published in print January 2011 | ISSN: 0034-6527
Published online January 2011 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1093/restud/rdq017
Learning and Complementarities in Speculative Attacks

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  • Information, Knowledge, and Uncertainy
  • Economics
  • International Finance

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We study a model where the aggregate trading of currency speculators reveals new information to the central bank and affects its policy decision. We show that the learning process gives rise to coordination motives among speculators leading to large currency attacks and introducing non-fundamental volatility into exchange rates and policy decisions. We show that the central bank can improve the ex ante effectiveness of its policy by committing to put a lower weight ex post on the information from the market, and that transparency may either increase or decrease the effectiveness of learning from the market, depending on how it is implemented.

Keywords: Currency attacks; Financial markets; Global games; Strategic complementarities; Heterogenous information; Learning; coordination; Feedback effect; F31; G01; D84

Journal Article.  12449 words.  Illustrated.

Subjects: Information, Knowledge, and Uncertainy ; Economics ; International Finance

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