Signaling in a Global Game: Coordination and Policy Traps

Abstract

This paper introduces signaling in a global game so as to examine the informational role of policy in coordination environments such as currency crises and bank runs. While exogenous asymmetric information has been shown to select a unique equilibrium, we show that the endogenous information generated by policy interventions leads to multiple equilibria. The policy maker is thus trapped into a position in which self‐fulfilling expectations dictate not only the coordination outcome but also the optimal policy. This result does not rely on the freedom to choose out‐of‐equilibrium beliefs, nor on the policy being a public signal; it may obtain even if the policy is observed with idiosyncratic noise.