Defending against Speculative Attacks: The Policy Maker's Reputation
40 Pages Posted: 17 Nov 2011 Last revised: 20 Aug 2016
Date Written: August 18, 2016
Abstract
This paper studies how the interaction between policy maker's reputation for defending against speculative attacks and speculators' learning of the policy maker's type determines the emergence of speculative attacks and the outcome of regime change. If speculators receive conditionally independent and identically distributed private signals about the policy maker’s type in every period, then no matter how precise their per-period private signals are, there can be no equilibrium with attacks, even if it is almost common knowledge that the policy maker’s value from the status quo is low. If the precision of speculators’ private signals increases as a power function with the power strictly greater than two, there exist infinitely many equilibria with attacks, but this equilibrium multiplicity arises from the timing of the attacks only. In such a case, the set of status quos surviving in any equilibrium is strictly larger than in the case of a short-lived policy maker.
Keywords: Speculative attacks, Reputation, Coordination, Common Learning
JEL Classification: D83, D84, F31, G01
Suggested Citation: Suggested Citation
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