Signaling in a Global Game: Coordination and Policy Traps

38 Pages Posted: 25 Jun 2006 Last revised: 3 Jun 2010

See all articles by George-Marios Angeletos

George-Marios Angeletos

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Christian Hellwig

University of Toulouse 1 - Toulouse School of Economics (TSE)

Alessandro Pavan

Northwestern University

Date Written: June 1, 2006

Abstract

This paper introduces signaling in a global game so as to examine the informational role of policy in coordination environments such as currency crises and bank runs. While exogenous asymmetric information has been shown to select a unique equilibrium, we show that the endogenous information generated by policy interventions leads to multiple equilibria. The policy maker is thus trapped into a position in which self-fulfilling expectations dictate not only the coordination outcome but also the optimal policy. This result does not rely on the freedom to choose out-of-equilibrium beliefs, nor on the policy being a public signal; it may obtain even if the policy is observed with idiosyncratic noise.

Suggested Citation

Angeletos, George-Marios and Hellwig, Christian and Pavan, Alessandro, Signaling in a Global Game: Coordination and Policy Traps (June 1, 2006). Journal of Political Economy, Vol. 114, pp. 452-484, June 2006. Available at SSRN: https://ssrn.com/abstract=911242

George-Marios Angeletos (Contact Author)

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Christian Hellwig

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

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Alessandro Pavan

Northwestern University ( email )

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