This paper studies the implications of the presence of a large speculator such as George Soros during a contagious currency crisis. The model shows that the presence of the large speculator makes countries more vulnerable to crises, but mitigates the contagion of crises across countries. The model presents policy implications of financial disclosure and size regulation of speculators such as hedge funds. First, financial disclosure by speculators eliminates contagion, but may make countries more vulnerable to crises. Second, regulating the size of speculators (e.g., prohibiting hedge funds from high leverage and thereby limiting the amount of short selling) makes countries less vulnerable to crises, but makes contagion more severe.
Keywords: Contagion; Currency Crises; Global Game
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.