02085cas a2200241 a 4500 AALejournalIMF002870 230101c9999 xx r poo 0 0eng d 5.00 USD 9781451844290 1018-5941 BD-DhAAL BD-DhAAL Surti, Jay. Rational Speculation, Financial Crises, and Optimal Policy Responses / Jay Surti. Washington, D.C. : International Monetary Fund, 2004. 1 online resource (28 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students This paper develops a theory of the onset of financial crises by solving for the optimal trading strategies of speculators in financial markets, in a model where each speculator tries to coordinate her trades with the market's by observing the decisions of other speculators, while simultaneously trying to preempt the market. The interaction and resolution of these two conflicting incentives are analyzed under alternate central bank policy regimes. Our model explains how imperfect information structures prevent traders from exploiting profitable opportunities and suggests how large traders help alleviate this problem by undertaking risky arbitrage early in the investment process, in return for higher profits, if successful. The central bank's defense strategy is a parameter of this model. We compare the likelihood of a crisis under alternate defense strategies and show that credible monetary authorities can provide a better defense of exchange rate regimes against adverse shocks by not disclosing their commitment value to the market. Mode of access: Internet IMF Working Papers; Working Paper ; No. 2004/025 Full text available on IMF http://elibrary.imf.org/view/journals/001/2004/025/001.2004.issue-025-en.xml IMF e-Library