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Foreign devaluation as a coordinating device of heterogeneous investors: A game‐theoretic analysis of financial contagion

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  • Lioudmila Savtchenko

Abstract

This paper investigates financial contagion by extending the Morris–Shin (1998) model of financial crises. It is assumed that before a devaluation in a foreign country, home investors have only private information on the state of the home country. It is demonstrated that the occurrence of a currency crisis in the foreign country may trigger a similar crisis in the home country by coordinating heterogeneous beliefs of home investors. The model is designed to describe the Asian currency crisis of 1997.

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  • Lioudmila Savtchenko, 2010. "Foreign devaluation as a coordinating device of heterogeneous investors: A game‐theoretic analysis of financial contagion," International Journal of Economic Theory, The International Society for Economic Theory, vol. 6(2), pages 195-204, June.
    • Handle: RePEc:bla:ijethy:v:6:y:2010:i:2:p:195-204
    DOI: 10.1111/j.1742-7363.2010.00130.x
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    References listed on IDEAS

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    Cited by:

    1. Takuma Kunieda & Akihisa Shibata, 2014. "Credit Market Imperfections and Macroeconomic Instability," Pacific Economic Review, Wiley Blackwell, vol. 19(5), pages 592-611, December.

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