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The Dynamics Of Financial Crises And The Risk To Defend The Exchange Rate

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Executive Summary

Despite major recent advance in the literature on financial crises, the key role of central banks in the dynamics of financial crises is still not well understood. The authors aim is to contribute to a better understanding of the dynamics of financial crises by explicitly modeling the strategic options of both traders and central banks. They analyze a global game in which both speculative traders and the central bank face imperfect information. In case of an attack, the central bank basically faces three alternatives. It can either give in to the speculative attack or it can try to defend its exchange rate regime. If it chooses to defend its currency, the defense can be successful or not.

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