In the late 1990s, Morris and Shin proposed a new theoretical framework of
financial crises, which generalised traditional models of strategic
complementarity and self-fulfilling beliefs by incorporating idiosyncratic
uncertainty about the state. The innovative feature of their framework is
expressed by its capacity to account for seemingly unwarranted speculative
attacks under equilibrium uniqueness and to thus place policy analysis on a firm
footing. The macroeconomic implications of the framework have been questioned,
however, because it ignores the issue of information aggregation via market
prices. Motivated by such criticism, this paper modifies the Morris-Shin setup
by allowing prices to adjust freely to market conditions. It is then shown that
all of the appealing characteristics of that setup are preserved even when
public information has an endogenously disseminated component. Moreover, the
prevailing weak form of strategic complementarity, in conjunction with
heterogeneity of private agents' information sets, leads to a less restrictive
prerequisite for equilibrium uniqueness. Further, the paper's model delivers new
policy implications and suggests a change in the approach of structural currency
crisis empirical analysis.
