Solving Currency Crisis Models in Global Games - the Morris/Shin-Model (1998)

Abstract

The current chapter describes the type of models introduced by Morris and Shin (1998), who used a global games setting to derive a unique equilibrium from a currency crisis model with self-fulfilling beliefs. Their paper provides the framework that we are going to use in order to derive further results con-cerning the role of information dissemination in the chapters to follow. In a first step, however, we will present the procedure of eliminating equilibria in a basic currency crisis model, where speculators do not know the fundamental state of the economy but receive noisy information about it. The emphasis in this chapter therefore is on the method of iteratively eliminating dominated strategies in a currency crisis setting and on showing that the prevailing equi-librium indeed is the risk-dominant one, as has been stated in Chap. 4.