Speculator-Triggered Crisis and Interventions

This paper adds a speculator and an authority to a benchmark global game model to investigate how the speculator endangers a business or an economy, and what the authority can do about it. It is found that when the attacking cost is relatively low, the existence of a speculator increases the nancial system's vulnerability by serving as a coordinating device for the investors and thus triggering the crisis. To counteract this eect, we compare three dierent intervention policies imposed by the authority: deterring the speculator, rewarding holding investors, and eliminating the preemption motives among investors. We argue that the rst method may not work because of the multiplicity problem; the second one is almost useless when a crisis is about to happen; the last tool works given enough eort. We then use a discussion of dierent intervention polices employed by governments during the 1997 Asian nancial crisis to illustrate the theoretical results. Specifically, we explain why the capital regulation policies did not work, why interest rate defense policies could not stop capital flights, how Hong Kong's intervention worked, and how the IMF programs failed to rescue the participating countries by impeding them from eliminating the preemption motives