Coordination Failures and Asset Prices

We augment a standard global coordination game along the lines of Morris and Shin (1998) by an asset market where prices are determined in a noisy Rational Expectations Equilibrium. We study the implications of information aggregation through prices for equilibrium selection arguments in global coordination games, first in a model where the asset market is separate from the coordination game but asset payoffs conditioned on the same fundamentals, then in a stylized currency crises model, where the asset market itself gives rise to the coordination problem. Information aggregation overturns the global games argument for equilibrium uniqueness, and implies that there may be multiple equilibria, in particular when private information is sufficiently precise. This conclusion also arises robustly within our currency crises model, provided that we take into account the role of domestic interest rates in determining the ultimate coordination outcome, along the lines suggested by Obstfeld (1986 and 1996). Despite multiplicity, the global games approach yields novel insights: All equilibria are characterized by discrete changes in domestic interest rates and the probability of devaluation in response to small changes in underlying fundamentals.