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Unformatted text preview: Crises and Prices Information Aggregation, Multiplicity and Volatility * George-Marios Angeletos MIT and NBER Iv an Werning MIT, NBER and UTDT This version: April 2006. First draft: January 2004. Abstract Crises are volatile times when endogenous sources of information are closely monitored. We study the role of information in crises by introducing a financial market in a global coordination game. The asset price aggregates dispersed private information acting as a noisy public signal. In contrast to the case with exogenous information, our main result is that uniqueness may not obtain as a perturbation from perfect information: multiplicity is ensured with small noise. In addition, we show that: (i) multiplicity may emerge in the financial price itself; (ii) less noise may contribute towards non-fundamental volatility even when the equilibrium is unique; and (iii) similar results obtain for a model where individuals observe one anothers actions, highlighting the importance of endogenous information more generally. JEL Codes: D8, E5, F3, G1. Keywords: Multiple equilibria, coordination, global games, speculative attacks, currency crises, bank runs, financial crashes, rational expectations. * We are grateful to the coeditor, Richard Rogerson, and three anonymous referees for their comments and sug- gestions. We also thank Daron Acemoglu, Fernando Alvarez, Manuel Amador, Olivier Blanchard, Gadi Barlevy, Ricardo Caballero, V.V. Chari, Harold Cole, Christian Hellwig, Patrick Kehoe, Stephen Morris, Alessandro Pavan, Bernard Salani e, Jos e Scheinkman, Bal`azs Szentes, Aleh Tsyvinski, and seminar participants at Boston Univer- sity, Brown, Columbia, Duke, Georgetown, Iowa State University, Harvard, MIT, Princeton, Stanford, UC-Berkeley, UCLA, the Federal Reserve Banks of Boston, Chicago and Minneapolis, the 2004 Minnesota Summer Workshop in Macroeconomic Theory, the 2004 UTDT Summer Workshop in International Economics and Finance, the 2005 NBER Economic Fluctuations and Growth meeting in San Francisco, the 2005 Annual CARESS-Cowles Conference on General Equilibrium, the 2005 workshop on Beauty Contests in Cambridge, UK, the 2005 SED meeting, and the 2005 NBER Summer Institute. We are grateful to Emily Gallagher for valuable editorial assistance and to the Federal Reserve Bank of Minneapolis for their hospitality during the time the revision for this paper was completed. Email addresses: email@example.com, firstname.lastname@example.org. 1 1 Introduction Its a love-hate relationship, economists are at once fascinated and uncomfortable with multiple equilibria. On the one hand, crises can be described as times of high non-fundamental volatility: they involve large and abrupt changes in outcomes, but often lack obvious comparable changes in fundamentals. Many attribute an important role to more or less arbitrary shifts in market sentiments or animal spirits, and models with multiple equilibria formalize these ideas....
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This note was uploaded on 04/29/2010 for the course ECON 345 taught by Professor Sumaila during the Fall '09 term at The University of British Columbia.
- Fall '09