A Theory of the Onset of Currency Attacks

CEPR Discussion Paper Series No. 2025

Posted: 7 Apr 1999

See all articles by Hyun Song Shin

Hyun Song Shin

Bank for International Settlements (BIS)

Stephen Morris

MIT

Date Written: November 1998

Abstract

The swiftness and devastating impact of recent financial crises have taken many market participants by surprise and pose challenges for economists seeking a theory of the onset of a crisis. We propose such a theory based on two features. The actions of diverse economic actors which undermine the currency are mutually reinforcing, while the fragmented nature of the media create small disparities in their information. In such circumstances, the beliefs of market participants can be tracked in the same way as the economic fundamentals, and an attack is triggered when the economic fundamentals deteriorate sufficiently to fall below the minimum level of market confidence necessary to support the currency. We give a characterization of such a minimum level of confidence.

JEL Classification: D82, F31

Suggested Citation

Shin, Hyun Song and Morris, Stephen Edward, A Theory of the Onset of Currency Attacks (November 1998). CEPR Discussion Paper Series No. 2025. Available at SSRN: https://ssrn.com/abstract=142792

Hyun Song Shin (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

Stephen Edward Morris

MIT ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

HOME PAGE: http://https://economics.mit.edu/faculty/semorris

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