Unique Equilibrium in a Dynamic Model of Speculative Attacks |
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Authors: | Tijmen R Daniëls |
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Institution: | (1) Department of Economics, Feng-Chia University, Taichung, 407, Taiwan;(2) Institute of Economics, Academia Sinica, Nankang, Taipei, 115, Taiwan;(3) Department of Economics, National Cheng Chi University, Taipei, 116, Taiwan |
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Abstract: | A main challenge of understanding currency crises is explaining their puzzling timing. Most “second generation” currency crisis
models are static models with multiple equilibria, and exogenous shifts between equilibria are interpreted as shifts of sentiments
on financial markets leading to crises. This article develops a dynamic, continuous time model with a payoff structure similar
to second generation models. We derive endogenous conditions under which shifts in sentiment occur over time, characterise
them in terms the strategic risk associated with speculation, and provide comparative statics. Moreover, we show that the
findings correspond almost exactly to the implications of global game currency crisis models, which are often used for equilibrium
selection in the static context. |
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Keywords: | |
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