Macroeconomic tail risk, currency crises and the inter‐war gold standard
Chanelle Duley,
Prasanna Gai
Abstract:We introduce macroeconomic tail risk into the canonical global game model of currency crises. The exchange rate peg is attacked if fundamentals reach a critical threshold, or if there is a sufficiently large public shock. Large shocks generate doubt amongst investors about both the state of the world and about what others know, giving rise to multiple equilibria. We find a non‐monotonic relationship between tail risk and the probability of (a fundamentals‐based) crisis and show how this effect depends on the m… Show more
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