Discussion  pp. 256-262


By Jonathan P. Thomas

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Chapter 7 takes further the ideas of Morris and Shin (1998) in that it allows for more natural Brownian-motion representation of fundamentals. In addition the chapter assumes that the information of market participants about the true value of the fundamental is distributed according to a normal distribution about the true value, as opposed to a uniform distribution in the earlier paper. This allows the authors to tell a dynamic story about when a currency attack might occur, and also to examine what happens when the nature of the differential private information is varied. The results remain startling: a tiny departure from common knowledge entirely eliminates the multiplicity of equilibria. This work represents a major challenge to the traditional multiple-equilibrium models of currency attacks, most notably associated with Obstfeld (1986, for example). Of course the insights here are also applicable to other market situations with similar multiple-equilibrium properties, such as bank-run models.

The arguments of the chapter, however, are technical and it is difficult to get a clear idea of why a small departure from common knowledge about the fundamental can lead to such a radical change in the set of equilibria. So I will start by attempting an overview of the argument, before discussing the extent to which I think these insights are important.