Optimal Risk Taking and Information Policy to Avoid Currency and Liquidity Crises

This paper reconsiders the principal's problem of determining the optimal combination of risk taking and information dissemination, when threatened with a coordinated speculative attack on the fixed exchange rate by traders, respectively a coordinated withdrawal of credits by a group of lenders. In a global game approach, we find that optimal risk and economic transparency are contingent on the prior expected mean of fundamentals. Whenever the prior mean of economic performance is below a certain threshold, the central bank respectively the firm should commit to maximal risk and to disclosing private information of maximal precision. For good prior expectations, in contrast, optimal policy requires the principal to avoid any risks and to disseminate private information of lowest possible precision