This hurdle process also has the feature that it moves in the opposite direction to the fundamentals. Thus, when fundamentals deteriorate, the hurdle shifts upwards, making it more difficult to clear the hurdle. This feature of our theory suggests that a country which is undergoing a currency crisis faces a double jeopardy. Not only are the economic fundamentals deteriorating, but the hurdle which it needs to negotiate is also moving against it. The answer suggested by our theory is that when the conditions are ripe for attack, the onset of crisis can proceed at a rapid pace, not due to unexplained panic, but due to forces which may be accounted for in the theory.
Information plays a subtle role in financial crises.
Our theory suggests that the current vogue of calling for improved transparency in the fundamentals may, at best, have only a limited effect in curbing currency crises. The absolute quality of information is less important than the small disparities in the information of market participants. However, even vanishingly small differences in information lead to sufficient uncertainties concerning the beliefs of others, that the argument outlined in our paper holds force.