Publication Date: 2006
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The paper highlights how the interaction of domestic informational frictions, perfect capital mobility, and foreign interest rates can combine to provoke a sudden depreciation of the exchange rate and a prolonged decline in output. In particular,the authors describe conditions under which two differente quilibria exist. One has a high level of outputand a minorcostly-state-verificationproblem, and the other equilibrium has a higher level of output and a severe costly-state-verification problem.