OPTIMAL EXCHANGE RATE REGIME UNDER THE RISK OF A CO-ORDINATED SPECULATIVE ATTACK A GLOBAL GAME APPROACH

In a global game approach, this paper reconsiders exchange rate regimes directed at promoting stability and economic activity in countries vulnerable to co-ordinated speculative attacks. We find that optimal exchange rate regimes are contingent on the prior mean of fundamentals, so that exchange rate policies conducted in an institutionalised setting may be detrimental for the country. In addition, we show that the effect of a Tobin tax on the likelihood of financial crisis is at best ambiguous and depends too on the prior mean of fundamentals