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EXPECTATIONS AND CONTAGION IN SELF‐FULFILLING CURRENCY ATTACKS *
Author(s) -
Keister Todd
Publication year - 2009
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/j.1468-2354.2009.00556.x
Subject(s) - economics , currency , self fulfilling prophecy , empirical evidence , currency crisis , contagion effect , positive economics , monetary economics , psychology , keynesian economics , social psychology , financial crisis , epistemology , philosophy
Self‐fulfilling expectations are commonly believed to play an important role in the transmission of currency crises across countries. Formal models of contagion based on multiple equilibria, however, have been criticized for failing to explain basic patterns observed in the data; these criticisms have been taken as evidence against the self‐fulfilling view. This article argues that the importance of self‐fulfilling beliefs is not so easily dismissed. A slightly richer model, based on the incomplete‐information framework of Morris and Shin ( American Economic Review 88 (1998), 587–97), can generate contagion due to self‐fulfilling beliefs while placing restrictions on observable variables that are broadly consistent with the empirical evidence.