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Risk and wealth in a model of self-fulfilling currency attacks

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  • Guimaraes, Bernardo
  • Morris, Stephen

Abstract

We analyze the effect of risk aversion, wealth and portfolios on the behavior of investors in a global game model of currency crises with continuous action choices. The model generates a rich set of striking theoretical predictions. For example, risk aversion makes currency crises significantly less likely; increased wealth makes crises more likely; and foreign direct investment (illiquid investments in the target currency) make crises more likely. Our results extend linearly to a heterogeneous agent population.
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  • Guimaraes, Bernardo & Morris, Stephen, 2007. "Risk and wealth in a model of self-fulfilling currency attacks," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2205-2230, November.
    • Handle: RePEc:eee:moneco:v:54:y:2007:i:8:p:2205-2230
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    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • F3 - International Economics - - International Finance

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