Title

Risk and Wealth in a Model of Self-Fulfilling Currency Attacks

Document Type

Discussion Paper

Publication Date

9-1-2003

CFDP Number

1433R

CFDP Revision Date

2004-11-01

CFDP Pages

31

Abstract

Market participants’ risk attitudes, wealth and portfolio composition influence their positions in a pegged foreign currency and, therefore, may have important effects on the sustainability of currency pegs. We analyze such effects in a global game model of currency crises with continuous action choices. The model, solved in closed form, generates a rich set of theoretical predictions consistent with many popular and academic (unmodelled) speculations about the onset and timing of currency crises. The results extend linearly to a heterogeneous agent population.

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