Shadow rates and multiple equilibria in the theory of currency crises

This note generalizes to second generation models of currency crises the ar bitrage-based approach first applied by Flood and Garber to first generatio n models. Deriving policy-switching rules based on the 'shadow exchange rat e' facilitates the comparative analysis of the literature. Using the 'shado w rate', we provide and discuss an example of a common mechanism generating multiple equilibria in both first and second generation models. (C) 2000 E lsevier Science B.V. All rights reserved.