Abstract
This paper considers the question of currency crisis in a dynamic setting in which agents do nothold rational expectations. Under a sufficient condition the paper shows the possibility of a collapse of the currency due to a progressive loss of reserves. It is important to note that a collapse is not triggered by a bad policy, or bad luck, but due to a regime-shift from a stable to an unstable and unique steady state – bad equilibrium. In this sense the paper offers a new explanation of currency crisis: a crisis that erupts even when there is no evidence of bad policy, or of multiple equilibria (bad luck). The model is further extended to a case of heterogeneous agents.
Original language | English |
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Article number | 122860 |
Number of pages | 8 |
Journal | Physica A: Statistical Mechanics and its Applications |
Volume | 538 |
DOIs | |
Publication status | Published - 15 Jan 2020 |
Bibliographical note
Publisher Copyright:© 2019
Keywords
- financial crises
- foreign exchange rates
- money