CFDP 1433R

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

Author(s): 

Publication Date: September 2003

Revision Date: November 2004

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.

Keywords: 

Currency crisis, global games, risk aversion, wealth, portfolio

JEL Classification Codes:  F3, D8

Note: 

Published in Journal of Monetary Economics (November 2007), 54(8): 2205-2230 [DOI]