- Home
- Publications
- When The Penny Doesn’t Drop – Macroeconomic Tail Risk And Currency Crises
When the Penny Doesn’t Drop – Macroeconomic Tail Risk and Currency Crises
External Authors
Duley, C
Gai, P
Related Themes
Macro-Economic Dynamics and PolicyJEL Code
F31, G01, E44, N24
Paper Category Number
520
We extend the canonical global game model of currency crises to allow for macroeconomic tail risk. 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 magnitude and direction of public shocks. Our analysis sheds new light on the way in which international financial contagion played a part in the sterling crisis of 1931.
Related Blog Posts
Public Debt Sustainability and Fiscal Rules
Stephen Millard
Benjamin Caswell
05 Feb 2024
4 min read
Related Projects
Related News
Call for Papers: Lessons From Quantitative Easing & Quantitative Tightening
09 Feb 2024
1 min read
Related Publications
The Nature of the Inflationary Surprise in Europe and the USA
21 Mar 2024
Discussion Papers
Energy and Climate Policy in a DSGE Model of the United Kingdom
08 Mar 2024
Discussion Papers
Exploring Alternative Data Sources for Household Wealth Statistics
24 Jan 2024
Discussion Papers