Speculative Attacks: Unique Sunspot Equilibrium and Transparency

Models with multiple equilibria are a popular way to explain currency attacks. Morris and Shin (1998) have shown that, in the context of those models, unique equilibria may prevail once noisy private information is introduced. In this paper, we generalize the results of Morris and Shin to a broader class of probability distributions and show | using the technique of iterated elimination of dominated strategies | that uniqueness will hold, even if we allow for sunspots and individual uncertainty about strategic behavior of other agents. We provide a clear exposition of the logic of this model and we analyse the impact of transparency on the probability of a speculative attack. For the case of uniform distribution of noisy signals, we show that increased transparency of government policy reduces the likelihood of attacks. JEL Classi ̄cation F 31, D 82 Authors' address: Goethe{UniversitÄat Frankfurt Dept. of Economics P.O. Box 81 Mertonstr. 17 D{60054 Frankfurt am Main Germany Phone +49 69 798 250 03 Fax +49 69 798 250 65 e-mail [email protected] ¤We would like to thank three anonymous referees for helpful comments.