TY  - JOUR
AU  - Angeletos,George-Marios
AU  - Hellwig,Christian
AU  - Pavan,Alessandro
TI  - Coordination and Policy Traps
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9767
PY  - 2003
Y2  - June 2003
UR  - http://www.nber.org/papers/w9767
L1  - http://www.nber.org/papers/w9767.pdf
N1  - Author contact info:
George-Marios Angeletos
Department of Economics
MIT E52-251
50 Memorial Drive
Cambridge, MA  02142-1347
Tel: 617/452-3859
Fax: 617/253-1330
E-Mail: angelet@mit.edu

Christian Hellwig
Toulouse School of Economics
Manufacture de Tabacs,
21 Allées de Brienne,
31000 Toulouse
Tel: +33 5 61 12 85 93
Fax: +33 5 61 12 86 37
E-Mail: christian.hellwig@tse-fr.eu

Alessandro Pavan
Northwestern University
Department of Economics
2001 Sheridan Road
Arthur Andersen Hall 3239
Evanston, IL 60208
E-Mail: alepavan@northwestern.edu
AB  - This paper examines the ability of a policy maker to control equilibrium outcomes in an environment where market participants play a coordination game with information heterogeneity. We consider defense policies against speculative currency attacks in a model where speculators observe the fundamentals with idiosyncratic noise. The policy maker is willing to take a costly policy action only for moderate fundamentals. Market participants can use this information to coordinate on di.erent responses to the same policy action, thus resulting in policy traps, where the devaluation outcome and the shape of the optimal policy are dictated by self-fulfilling market expectations. Despite equilibrium multiplicity, robust policy predictions can be made. The probability of devaluation is monotonic in the fundamentals, the policy maker adopts a costly defense measure only for a small region of moderate fundamentals, and this region shrinks as the information in the market becomes precise.
ER  -