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Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks: Comment

Prof. Dr. Frank Heinemann
published in:
American Economic Review 90 (1), 2000, pp. 316-318.


In a recent issue of the American Economic Review Stephen Morris and Hyun Song Shin (1998 prove the uniqueness of an equilibrium in a model of self-fulfilling currency attacks, when speculators face uncertainty in their signals about macroeconomic fundamentals. In Theorem 2 of their paper, Morris and Shin characterize the equilibrium as uncertainty approaches zero. They claim that the threshold of the fundamental state, up to which a currency attack will occur with probability one, is independent of the critical mass of capital needed for an attack to be successful. Hence, direct capital controls are less effective when speculators have fairly precise information about fundamentals. Yet, their Theorem 2 holds only for a special case. This comment gives the correct generalization and proves that for small uncertainty currency crises depend on the critical mass of capital needed for success. Thus, direct capital controls are effective even when fundamentals are fairly transparent to all market participants.

Keywords: Speculative attacks, capital controls
JEL classifiacation: F 31, D 82

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