An evolutionary model of speculative attacks

We build an evolutionary model of currency crises incorporating learning through imitation and experimentation by heterogeneous agents. Foreign currency speculators in the model interact and learn over time through experimentation. Drawing on results from game theory, we show that the resulting dynamic converges to a unique long run equilibrium, in which the currency is “attacked” if the economic fundamentals are sufficiently adverse. Evolutionary selection is thus shown as a way to resolve the issue of indeterminacy of equilibria associated with models of currency crises. Copyright Springer-Verlag Berlin/Heidelberg 2005