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Currency Speculation in a Game-Theoretic Model of International Reserves

Author

Listed:
  • Carlos J. Perez

    (Universidad Carlos III de Madrid)

  • Manuel S. Santos

    (Department of Economics, University of Miami)

Abstract

This paper is concerned with the ability of speculation to generate a currency crisis. We consider a game-theoretic setting between a unit mass of speculators and a government that holds foreign currency reserves. We analyze conditions under which the speculators may be able to force the government to devaluate the currency. Among these conditions, we analyze the role of heterogeneous beliefs, transaction costs, the level of international reserves, and the widening of currency bands. The explicit consideration of international reserves in our model makes speculators’ actions to be strategic substitutes— rather than strategic complements. This is a main analytical departure with respect to related global games of currency speculation not including reserve holdings (e.g., Morris and Shin, 1998). Our simple framework with international reserves becomes suitable to review some long-standing policy issues.

Suggested Citation

  • Carlos J. Perez & Manuel S. Santos, 2011. "Currency Speculation in a Game-Theoretic Model of International Reserves," Working Papers 2011-2, University of Miami, Department of Economics.
    • Handle: RePEc:mia:wpaper:2011-2
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    File URL: https://www.herbert.miami.edu/_assets/files/repec/2011-2.pdf
    File Function: First version, 2011
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    Cited by:

    1. Manuel S. Santos, 2012. "How home loan modification through the 60/40 plan can save the housing sector," Review, Federal Reserve Bank of St. Louis, vol. 94(Mar), pages 102-116.

    More about this item

    Keywords

    Currency speculation; international reserves; currency crises; global games; asymmetric information.;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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