EconStor >
University of Oslo >
Department of Economics, University of Oslo >
Memorandum, Department of Economics, University of Oslo >

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10419/63114
  
Title:Optimal bailout during currency and financial crises: A sequential game analysis PDF Logo
Authors:Mundaca, Gabriela
Issue Date:2002
Series/Report no.:Memorandum, Department of Economics, University of Oslo 2002,27
Abstract:We present a model that illustrates the close relationship between the possibility of a currency crisis and the amount of private-sector debt within a four-stage sequential game framework. In the first stage, the government announces its exchange rate policy, and all agents in the economy receive probabilistic information about a future shock that will occur in the last stage. This shock will affect unemployment and net returns on private sector investment. The private sector in stage 2 forms expectations about the future exchange rate and engages in risky investments. In stage 3, the government faces costs due to expectations of future devaluation and private-sector debt, anticipating the stochastic shock that will occur in stage 4 and may or may not find it optimal to pre-emptively abandon its fixed exchange rate policy. The government can commit already in stage 1 to bailing out part of the private sector's outstanding debt if a bad shock occurs or wait until stage 4 to give an optimal bailout. A commitment to bailing out provides a reconciliation of the multiple equilibria that result from self-fulfilling expectations. Moreover, the government may sometimes avert currency crises by committing to bailing out.
Subjects:currency crisis
private-sector debt
sequential game analysis
financial crises
JEL:E44
F30
F41
Document Type:Working Paper
Appears in Collections:Memorandum, Department of Economics, University of Oslo

Files in This Item:
File Description SizeFormat
354827456.pdf512.96 kBAdobe PDF
No. of Downloads: Counter Stats
Download bibliographical data as: BibTeX
Share on:http://hdl.handle.net/10419/63114

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.