TY - JOUR
T1 - Learning dynamics and endogenous currency crises
AU - Cho, In Koo
AU - Kasa, Kenneth
N1 - Funding Information:
We would like to thank Phillipe Bacchetta, Fabrizio Perri, Laura Veldkamp, and participants at the AEA, SED, and Econometric Society meetings for helpful comments on an earlier version. We owe special thanks to two anonymous referees. Financial support from the National Science Foundation (SES-0004315, ECS-0523620) is gratefully acknowledged. Any opinions, findings, and conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of the National Science Foundation. Address correspondence to: Kenneth Kasa, Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC V5A 1S6, Canada; e-mail: kkasa@sfu.ca.
PY - 2008/4
Y1 - 2008/4
N2 - This paper introduces adaptive learning into the third-generation currency crisis model of Aghion, Bacchetta, and Banerjee (2001, Currency crises and monetary policy in an economy with credit constraints, European Economic Review 45, 11211150). Adaptive learning might reflect, for example, uncertainty about the economy's exposure to adverse balance sheet effects. Even when equilibrium is unique, we show that the learning algorithm's escape dynamics can produce the same kind of Markov-switching exchange rate behavior that is typically attributed to sunspots or herds. An advantage of our learning model is that currency crises become endogenous, in the sense that their stochastic properties can be related to assumptions about learning and other structural features of the economy.
AB - This paper introduces adaptive learning into the third-generation currency crisis model of Aghion, Bacchetta, and Banerjee (2001, Currency crises and monetary policy in an economy with credit constraints, European Economic Review 45, 11211150). Adaptive learning might reflect, for example, uncertainty about the economy's exposure to adverse balance sheet effects. Even when equilibrium is unique, we show that the learning algorithm's escape dynamics can produce the same kind of Markov-switching exchange rate behavior that is typically attributed to sunspots or herds. An advantage of our learning model is that currency crises become endogenous, in the sense that their stochastic properties can be related to assumptions about learning and other structural features of the economy.
KW - Currency crises
KW - Learning
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U2 - 10.1017/S1365100507070046
DO - 10.1017/S1365100507070046
M3 - Article
AN - SCOPUS:39049124225
SN - 1365-1005
VL - 12
SP - 257
EP - 285
JO - Macroeconomic Dynamics
JF - Macroeconomic Dynamics
IS - 2
ER -