Table Of ContentLecture Notes in Economics
and Mathematical Systems 527
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Christina E. Metz
Information
Dissemination
in Currency Crises
Springer
Author
Dr. Christina E. Metz
Goethe-University Frankfurt
Finance Department
Mertonstr. 17-21
60325 Frankfurt
Germany
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To Stephan
Preface
Of course, this book cannot go without many thanks to my family, friends and
colleagues, who all had their part in the completion of it. Without their con
stant encouragement, constructive comments and also critique, my research
work would most probably have never led to the book you are holding in your
hands. Here, now, is my chance to thank them all.
First of all, my dearest thanks go to Prof. Jochen Michaelis, the supervisor
of my doctoral thesis. He was the one who guided me through the process of
finding my personal approach to economic research. By providing me with
constant support and undivided interest, I benefited tremendously from the
time we were working together. I cannot thank him enough for opening up
the world of science to me.
To Prof. Peter Weise I am indebted for very constructive comments
throughout my work and for refereeing my thesis together with Profs. Frank
Beckenbach and Rainer Stottner. Also, I would like to thank Prof. Hans
Nutzinger for always giving me advice and cheering-up words while we shared
the same floor at Kassel university.
This book would be unthinkable without the support by Hyun Song Shin,
Stephen Morris and Frank Heinemann. The whole idea of conducting theoreti
cal work on currency crises was sparked off by the paper of Stephen and Hyun.
Together with Frank they also kept the spark alive. In many discussions they
gave me new ideas of research questions still to be dealt with and interesting
insights into their own work. I will never be able to fully express my thanks
to Hyun for inviting me to work in the congenial atmosphere of the London
School of Economics. Also, I very much benefited from discussions in various
of the London seminars with Heski Bar-Isaac, Margaret Bray, Max Bruche,
Jon Danielsson and Charles Goodhart.
Special thanks go to my co-author Frank Heinemann. He is one of the very
rare kind of economists who take a real interest in other people's work and,
above all, take the time for a serious and detailed comment. Working together
with him was a pleasure and taught me how to derive theoretical results in
the most thorough way.
VIII Preface
With hindsight, I have to admit that the most exhausting part of my
dissertation's completion has been borne by my colleague J6rg Lingens. He
had to suffer from all my throwbacks and complaints, which inevitably made
their way to his office. Thanks, J6rg, for putting up with me during these
times.
The largest part of my gratitude is due to my family and friends. My
parents supported me in my scientific career in any possible way and never
lost their confidence in the course of life that I had chosen. Melanie Apel, my
friend of many years, had the difficult task of discussing all the non-scientific
aspects of my dissertation - a task that she mastered very well. Thank you
all for the effort you took in me.
My deepest thanks, however, are to my fiance, Stephan Bannier. He light
ened up my life in a way that I had never believed to be possible. Never
before have I experienced such an unfaltering confidence in my work and in
myself. He also had an eye on the linguistic style of this book, even from
overseas. Many thanks, Sid, for sending me the "Economical Writing" and for
introducing me to the mystic world of Power Point.
Finally, I want to express my gratitude towards the Center for Financial
Studies, Frankfurt. Apart from providing me with a constructive audience for
discussing my research results, I very much appreciate the generous support
that made this book possible.
Frankfurt, Christina E. M etz
January 2003
Contents
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Part I The Classical Currency Crisis Models
1 First-Generation Model- Krugman (1979) ................ 9
1.1 The Classical First-Generation Model by Krugman (1979) .... 10
1.2 Modifications of the First-Generation Model. . . . . . . . . . . . . . .. 14
1.2.1 Sterilizing Money-Supply Effects .................... 14
1.2.2 Sterilization and Risk Premia. . . . . . . . . . . . . . . . . . . . . .. 15
1.2.3 Assuming Uncertainties. . . . . . . . . . . . . . . . . . . . . . . . . . .. 16
2 Second-Generation Model - Obstfeld (1994) ............... 19
2.1 The Classical Second-Generation Model by Obstfeld (1994) . .. 20
2.2 Empirical Tests ......................................... 25
Part II Self-Fulfilling Currency Crisis Model with Unique
Equilibrium - Morris and Shin (1998)
3 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 29
4 Game-Theoretic Preliminaries . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 33
4.1 Games, Strategies and Information ........................ 33
4.2 Solving Coordination Games .............................. 39
4.3 Equilibrium Selection in Global Games - Carlsson and van
Damme (1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 44
4.4 Generalizing the Method to n-Player, 2-Action Games ....... 49
X Contents
5 Solving Currency Crisis Models in Global Games - The
Morris/Shin-Model (1998) ................................. 53
5.1 The Basic Model by Morris and Shin (1998) ................ 54
5.2 Interpretation of the Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 60
6 Transparency and Expectation Formation in the Basic
Morris/Shin-Model (1998) ................................. 63
6.1 Transparency ........................................... 63
6.2 Expectation Formation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 66
Part III The Influence of Private and Public Information in
Self-Fulfilling Currency Crisis Models
7 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 73
8 Characterization of Private and Public Information. . . . . . .. 77
9 The Currency Crisis Model with Private and Public
Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 81
g.l The Structure of the Model ............................... 81
9.2 The Complete Information Case - Multiple Equilibria ........ 83
9.3 Incomplete Public Information - Multiple Equilibria versus
Unique Equilibrium. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 84
9.4 Incomplete Public and Private Information - Unique
Equilibrium. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 87
9.4.1 Derivation of the Unique Equilibrium. . . . . . . . . . . . . . .. 88
9.4.2 The Uniqueness Condition .......................... 93
9.5 Comparative Statics ..................................... 94
9.6 Unique versus Multiple Equilibria and the Importance of
Private and Public Information ............................ 106
9.7 Conclusion ............................................. 107
10 Optimal Information Policy - Endogenizing Information
Precision .................................................. 113
10.1 The Model ............................................. 115
10.2 Optimal Risk Taking and Information Policy ................ 116
10.3 Conclusion ............................................. 129
Part IV Informational Aspects of Speculators' Size and Dynamics
11 Introduction ............................................... 135
Contents XI
12 Currency Crisis Models with Small and Large Traders ..... 137
12.1 The Basic Model with Small and Large Traders - Corsetti,
Dasgupta, Morris and Shin (2001) ......................... 139
12.2 Simplified Model ........................................ 147
12.2.1 The Derivation of Equilibrium ...................... 148
12.2.2 Comparative Statics ............................... 153
12.3 Conclusion ............................................. 159
13 Informational Cascades and Herds: Aspects of Dynamics
and Time .................................................. 163
13.1 Herding Behavior and Informational Cascades ............... 164
13.1.1 The Model by Banerjee (1993) ...................... 164
13.1.2 The Model by Bikhchandani, Hirshleifer and Welch
(1992) ........................................... 168
13.2 Currency Crises as Dynamic Coordination Games - Dasgupta
(2001) ................................................. 171
13.2.1 The Static Benchmark Case ........................ 172
13.2.2 Dynamic Game with Exogenous Order ............... 174
13.2.3 Dynamic Game with Endogenous Order .............. 178
13.3 Large Traders in Dynamic Coordination Games ............. 181
Part V Testing the Theoretical Results
14 Introduction ............................................... 189
15 Experimental Evidence .................................... 193
16 Empirical Evidence ........................................ 199
16.1 The Asian Crisis 1997-98 - Empirical Tests by Prati and
Sbracia (2001) .......................................... 199
16.2 The Mexican Peso Crisis 1994-95 - Descriptive Evidence ..... 207
16.2.1 The Venue of the Mexican Crisis .................... 207
16.2.2 Combining the Observations with Theoretical Results .. 213
Part VI Concluding Thoughts
References ..................................................... 225
