Precise Signals and Multiple Equilibria in Coordination Games: an Illustration (original) (raw)
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2008
This paper studies defense policies in a global-game model of speculative currency attacks. Although the signaling role of policy interventions sustains multiple equilibria, a number of novel predictions emerge which are robust across all equilibria. (i) The central bank intervenes by raising domestic interest rates, or otherwise raising the cost of speculation, only when the value it assigns to defending the peg—its “type”—is intermediate. (ii) Devaluation occurs only for low types. (iii) The set of types who intervene shrinks with the precision of market information. (iv) A unique equilibrium policy survives in the limit as the noise in market information vanishes, whereas the devaluation outcome remains indeterminate. (v) The payoff of the central bank is monotonic in its type. (vi) The option to intervene can be harmful only for sufficiently strong types; and when this happens, weak types are necessarily better off. While these predictions seem reasonable, none of them would hav...
Signaling in a Global Game: Coordination and Policy Traps
Journal of Political Economy, 2006
This paper examines the role of policy in coordination environments such as currency crises and bank runs by introducing signaling in a global game. 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. Multiplicity obtains even in environments where the policy is observed with idiosyncratic noise. It is sustained by the agents coordinating on different interpretations of, and different reactions to, the same policy choices. The policy maker is thus trapped into a position where self-fulfilling expectations dictate not only the coordination outcome but also the optimal policy.
The Role of Large Players in a Dynamic Currency Attack Game
2007
We establish a dynamic currency attack model in the presence of a large player (LP) based on Abreu and Brunnermeier (2003), which differs from most existing oneperiod static currency attack models. In an attack on a fixed exchange rate regime with a gradually overvaluing currency, both the inability of speculators to synchronize their attack and their incentive to time the collapse of the regime lead to the persistent overvaluation of the currency. We find that the presence of an LP, who is defined as a speculator with more wealth and superior information, can accelerate or delay the collapse of the regime, depending on his incentives to preempt other speculators or to "ride the overvaluation". When an LP's incentive to preempt other speculators is dominant, the presence of an LP will accelerate the collapse of the regime. However, when an LP's incentive to "ride the overvaluation" is dominant, the presence of an LP will delay the collapse of the regime. ...
Signaling Games and Stable Equilibria
The Quarterly Journal of Economics, 1987
Games in which one party conveys private information to a second through messages typically admit large numbers of sequential equilibria, as the second party may entertain a wealth of beliefs in response to out-of-equilibrium messages. By restricting those out-of-equilibrium beliefs, one can sometimes eliminate many unintuitive equilibria. We present a number of formal restrictions of this sort, investigate their behavior in specific examples, and relate these restrictions to Kohlberg and Mertens' notion of stability. *We are grateful to Anat Admati,
The role of a large trader in a dynamic currency attack model
Journal of Financial Intermediation, 2014
This paper studies the role of a large trader in a dynamic currency attack model based on Abreu and Brunnermeier (2003), who study stock market bubbles and crashes in a dynamic model with a continuum of rational small traders. We introduce a large trader into their model and apply it to currency attacks. In an attack against a fixed exchange rate regime with a gradually overvalued currency, traders lack common knowledge about the time when the overvaluation starts and need to coordinate to break a peg. Both the inability of traders to synchronize their attack and their incentive to time the collapse of the regime lead to the persistent overvaluation of the currency. We find that the presence of a large trader with perfect information induces small traders to attack sooner and leads to an accelerated collapse of the regime. But the presence of a large trader with noisy information may delay the collapse of the regime ex post. Moreover, a large trader with precise information tends to be at the rear of an attack. With noisy information, he could attack earlier or later than small traders. In both cases, the large trader affects market dynamics of the attack substantially.
A Coopetitive-dynamical game model for currency markets stabilization
2015
The aim of this paper is to propose a dynamical methodology to stabilize the currency markets and at same time to address, indirectly, the Credit Crunch phenomenon. We adopt Game Theory and, specifically, the new mathematical model of Coopetitive Game proposed in literature by D. Carfì with some its associated dynamical aspects. Our idea is to save the Euro (or other currencies) from speculative attacks, by introducing a currency transactions tax. Specifically, we focus on a real economic operator - our first player - and on an investment bank - our second player. The unique solution that allows both players to gain something, and therefore the only one collectively desirable, is represented by an agreement, between the two subjects, on the division of the maximum collective gain. Finally, we propose also a possible division of gains (even more advantageous than the previous one) in a coopetitive context, where the two above economic subjects use a loan by the European Central Bank (ECB), to obtain a greater gain.
We consider a game where one player, the Announcer, has to communicate the value of payo¤ relevant state of the world to a set of other players who play a coordination game with multiple equilibria. While everyone, the Announcer and the players, agree that coordination is desirable, the payo¤s of the players at the various equilibria are unequal, and thus players disagree as to which equilibrium they should coordinate on. What we argue and demonstrate experimentally is that in such coordination games it may be advantageous for a utilitarian benevolent Announcer to communicate in a coarse manner. This is true because such coarse communication may be able to mask existing payo¤ asymmetry and thereby facilitate coordination if people …nd it hard to coordinate in games with asymmetric equilibrium payo¤s.
2003
This paper examines the ability of a policy maker to control equilibrium outcomes in an environment where market participants play a coordination game with information heterogeneity. We consider defense policies against speculative currency attacks in a model where speculators observe the fundamentals with idiosyncratic noise. The policy maker is willing to take a costly policy action only for moderate fundamentals. Market participants can use this information to coordinate on di.erent responses to the same policy action, thus resulting in policy traps, where the devaluation outcome and the shape of the optimal policy are dictated by self-fulfilling market expectations. Despite equilibrium multiplicity, robust policy predictions can be made. The probability of devaluation is monotonic in the fundamentals, the policy maker adopts a costly defense measure only for a small region of moderate fundamentals, and this region shrinks as the information in the market becomes precise.