Learning and Complementarities: Implications for Speculative Attacks

50 Pages Posted: 8 Feb 2010

See all articles by Itay Goldstein

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department

Emre Ozdenoren

London Business School; Centre for Economic Policy Research (CEPR)

Kathy Yuan

London School of Economics & Political Science (LSE) - Department of Finance

Date Written: January 2010

Abstract

We study a model where the aggregate trading of currency speculators reveals new information to the central bank and affects its policy decision. We show that the learning process gives rise to coordination motives among speculators leading to large currency attacks and introducing non-fundamental volatility into exchange rates and policy decisions. We show that the central bank can improve the ex-ante effectiveness of its policy by committing to put a lower weight ex-post on the information from the market, and that transparency may either increase or decrease the effectiveness of learning from the market, depending on how it is implemented.

Keywords: Coordination, Currency attacks, Feedback effects, Financial markets, Global games, Heterogenous information, Strategic complementarities

JEL Classification: C7, F31, G14, G15

Suggested Citation

Goldstein, Itay and Ozdenoren, Emre and Yuan, Kathy Zhichao, Learning and Complementarities: Implications for Speculative Attacks (January 2010). CEPR Discussion Paper No. DP7651. Available at SSRN: https://ssrn.com/abstract=1547571

Itay Goldstein (Contact Author)

University of Pennsylvania - The Wharton School - Finance Department ( email )

The Wharton School
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Emre Ozdenoren

London Business School ( email )

Sussex Place
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London, London NW1 4SA
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Kathy Zhichao Yuan

London School of Economics & Political Science (LSE) - Department of Finance ( email )

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London, London WC2A 2AE
United Kingdom
+44 (0)20 7955 6407 (Phone)
+44 (0)20 7849 4647 (Fax)

HOME PAGE: http://fmg.lse.ac.uk/~kathy

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