This policy brief discusses the lessons for stablecoin adoption, fragility, and appropriate regulation through the lens of a theoretical model: https://www.suerf.org/suerf-policy-brief/73181/adoption-fragility-and-regulation-of-stablecoins
We offer a theory of contagion based on the information choice of investors after observing a financial crisis elsewhere. We study global coordination games of regime change in two regions with an unobserved common macro shock as the only link between regions. A crisis in the first region is a wake-up call to investors in the second region. It induces them to reassess the regional fundamental and acquire information about the macro shock. Contagion can even occur after investors learn that regions are unrelated (zero macro shock). Our results rationalize empirical evidence about contagious bank runs and currency crises after wake-up calls. We also derive new implications and discuss how these can be tested. (JEL D82, F3, G01)
- Keywords: wake-up call, information choice, financial crises, contagion, global games, regime change, fundamental re-assessment.