A Wake-Up Call: Information Contagion and Strategic Uncertainty

Sveriges Riksbank Working Paper Series No. 282

Riksbank Research Paper Series No. 113

47 Pages Posted: 18 Dec 2013 Last revised: 30 Sep 2015

See all articles by Toni Ahnert

Toni Ahnert

European Central Bank, Financial Research Division; Centre for Economic Policy Research (CEPR)

Christoph Bertsch

Sveriges Riksbank - Research Division

Date Written: October 1, 2013

Abstract

A successful speculative attack against one currency is a wake-up call for speculators elsewhere. Currency speculators have an incentive to acquire costly information about exposures across countries to infer whether their monetary authority’s ability to defend its currency is weakened. Information acquisition per se increases the likelihood of speculative currency attacks via heightened strategic uncertainty among speculators. Contagion occurs even if speculators learn that there is no exposure. Our new contagion mechanism offers a compelling explanation for the 1997 Asian currency crisis and the 1998 Russian crisis, both of which spread across countries with seemingly unrelated fundamentals and limited interconnectedness. The proposed contagion mechanism applies generally in global coordination games and can also be applied to bank runs, sovereign debt crises, and political regime change.

Keywords: contagion, coordination failure, global games, information acquisition

JEL Classification: C7, D82, F31, G01

Suggested Citation

Ahnert, Toni and Bertsch, Christoph, A Wake-Up Call: Information Contagion and Strategic Uncertainty (October 1, 2013). Sveriges Riksbank Working Paper Series No. 282, Riksbank Research Paper Series No. 113, Available at SSRN: https://ssrn.com/abstract=2364405 or http://dx.doi.org/10.2139/ssrn.2364405

Toni Ahnert

European Central Bank, Financial Research Division ( email )

ECB Tower
Sonnemannstraße 20
Frankfurt am Main

HOME PAGE: http://toniahnert.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Christoph Bertsch (Contact Author)

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden

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