Financial Crises and Equilibrium Uniqueness in Global Games Models of Crises
We uncover a novel interaction between strategic uncertainty in coordination games of incomplete information - such as currency crises, bank runs and financial crises and the informativeness of rational expectations equilibrium prices In financial markets with risk averse traders: when the private information of players in the coordination game is increased, the information conveyed by financial prices falls. We use this property to show that, differently from what argued by Angeletos and Werning (2006), information transmission from prices in financial markets can be consistent with the emergence of a unique equilibrium in global games of regime change, exactly when the private information of players in the game is sufficiently precise. In this sense, the original equilibrium uniqueness result of Morris and Shin (1998) for global games is robust to the introduction of endogenous information from financial markets.