Abstract

Models of self-fulfilling speculative attacks based upon the assumption of common knowledge of the state of the fundamentals are characterised generally by the presence of multiple equilibria. Morris and Shin (1998) however, show that a unique equilibrium is obtained when removing the assumption of complete information. In this article we provide an explanatory synthesis of the above mentioned model and we survey the contributions that originated from it. We argue that both the hypothesis of a deterministic link between the state of the fundamentals and the flexible exchange rate and the hypothesis that the actual state of the fundamentals can be univocally determined are unrealistic. Therefore we conclude that although the model proposed by Morris and Shin represents an excellent exercise of positive economics, it does not allow to draw any normative prescriptions of economic policy.