Speculation

Linguistics

Philosophy

Statistics

Devaluation

Government (linguistics)

Economics

Computer science

Exchange rate

Mathematics

Monetary economics

Value (mathematics)

Finance

Currency crisis

Machine learning

Currency

Journal of Macroeconomics

Based on a framework originally developed by Morris and Shin [Discussion paper, No. 95-24, 1995, University of Southampton], this model shows how a currency crisis may be triggered by a lack of common knowledge regarding government type. Speculators receive noisy differential information concerning the value a government places on maintaining an exchange rate parity. When this value falls in a particular region, the government will abandon the peg if a sufficient number of speculators sell their currency. However, it will maintain the peg if no attack is launched. This paper shows that, in this region, it is always optimal for the speculators to attack the currency, thereby forcing a devaluation.

Common knowledge and the value of defending a fixed exchange rate––an explanation of a currency crisis