Private and Public Information in Self-fulfilling Currency Crises

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. This paper analyzes the implications of currency crises in a model with unique equilibrium. Starting from a typical multiple equilibria model with self-fulfilling expectations we introduce noisy information, following Morris/Shin (1999). Under certain conditions for the noise parameter, all equilibria but one are eliminated so that we are able to derive comparative statics and subsequent policy devices. We can show that if the a priori expected fundamental state of the economy is good, there is an incentive for the government to disseminate very precise information. However, a high precision of public information increases the danger of an attack if ex-ante expected fundamentals are bad. Moreover, we find that the influence of private information's precision is exactly the reverse. Terms of use: Documents in $EVWUDFWThis paper analyzes the implications of currency crises in a model with unique equilibrium. Starting from a typical multiple equilibria model with self-fulfilling expectations we introduce noisy information, following Morris/Shin (1999). Under certain conditions for the noise parameter, all equilibria but one are eliminated so that we are able to derive comparative statics and subsequent policy devices. We can show that if the a priori expected fundamental state of the economy is good, there is an incentive for the government to disseminate very precise information. However, a high precision of public information increases the danger of an attack if ex-ante expected fundamentals are bad. Moreover, we find that the influence of private information's precision is exactly the reverse. JEL: F31, D82

The Theory of Global Games on Test: Experimental Analysis of Coordination Games with Public and Private Information

“…2 See Morris and Shin (1999), Daníelson et al (2001), Heinemann and Illing (2002), Hellwig (2002), Metz (2002), and Prati and Sbracia (2002). (1995), and Kübler and Weizsäcker (2004) show that subjects' behavior is more consistent with finite levels of beliefs over beliefs than with theoretical predictions from common knowledge.…”

Open-End Real Estate Funds in Germany – Genesis and Crisis

“…Referring to the results of the literature on "global games" 15 , it has been shown that investors' behavior is predictable, i.e. they choose a uniquely optimal strategy even for intermediate fundamental values, if they possess very precise private information, relative to the precision of publicly-available information (Morris and Shin (2002);Metz (2002)). In this respect, public information is defined as pieces of information that are known to all investors and that are known to be known to all investors and so forth.…”

Privacy or Publicity - Who Drives the Wheel?

“…Game theory relying on Nash equilibria typically assumes away this type of uncertainty (Hirshleifer and Riley, 1992). Whereas the model by Obstfeld (1994Obstfeld ( , 1996 includes neither fundamental nor behavioural uncertainty due to the assumption of complete and common information, the model by Morris and Shin (1998) Obstfeld (1994,1996) Sbracia and Zaghini (2001 Behavioural Uncertainty Heinemann and Illing (2002) Morris and Shin (1998) Metz (2002Metz ( , 2003a Heinemann and Metz (2002) A study by Sbracia and Zaghini (2001) analyses the case where information about fundamentals is public, but not completely precise, so that uncertainty about traders' behaviour is resolved, since all traders possess the same 'common' information, while fundamental uncertainty still prevails. Such situation might be interpreted as market participants holding the same view on publicly disseminated information.…”

“…In order to give advice to policy makers searching for the optimal design of information policy, Metz (2002Metz ( , 2003a and Heinemann and Metz (2002) examined more closely the simultaneous interrelation of private and public information on foreign exchange markets and their influence on traders' behaviour when characterized by strategic complementarities. 1 The studies found that the impact of the precision of information on traders' behaviour is contingent on two factors.…”

“…The 1997-98 Asian crisis also proves to be a useful example of information driving financial markets because of the many diverging beliefs held over the various Asian countries in the run-up to the crisis. The testable hypotheses in both papers, based on Metz (2002Metz ( , 2003a, question whether the uncertainty among market participants before and 8 during the crises significantly influenced the speculative pressure on the fixed parities and if this impact was contingent on both the market sentiment and on the type of information dominating the market, i.e. either private or public information.…”