UNIQUE EQUILIBRIUM IN A MODEL OF SELF-FULFILLING CURRENCY ATTACKS

Stephen Morris and

University of Pennsylvania

and

Hyun Song Shin

Nuffield College, Oxford University

 

January 1997

 

Abstract

Even though self-fulfilling currency attacks lead to multiple equilibria when fundamentals are common knowledge, we demonstrate the uniqueness of equilibrium when speculators face a small amount of noise in their signals about the fundamentals. The unique equilibrium depends not only on the fundamentals, but also on financial variables, such as the quantity of hot money in circulation and the costs of speculative trading. In contrast to multiple equilibrium models, our model allows analysis of policy proposals directed at curtailing currency attacks.