Devaluation without common knowledge
Forthcoming in the Journal of
In an economy with a fixed exchange rate
regime that suffers a random adverse shock, we study the strategies of
imperfectly and sequentially informed speculators that may trigger an
endogenous devaluation before it occurs exogenously. The game played by the
speculators has a unique symmetric Nash equilibrium which is a strongly
rational expectation equilibrium in the set of all strategies with delay.
Uncertainty about the extent to which the Central Bank is ready to defend
the peg extends the ex ante mean delay between the exogenous shock and the
devaluation. We determine endogenously the rate of devaluation.
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