The More We Know, the Less We Agree: Uncertainty, Confusion and Speculative Attacks
September 2009

Abstract

Polarization of opinions after public announcement is widely observed, but often considered to be inconsistent with Bayesian learning. I show that this is not the case in environments where higher-order expectations play a role. I characterize informational structures where public announcement leads to polarization in all higher-order expectations, but not in first-order expectations. To illustrate the economic consequences, I analyze a version of the speculative currency attack model of Morris and Shin (1998) where the central bank has imperfect knowledge of the state of the economy. To assess the probability of a devaluation, speculators have to second guess the expectation of the central bank. I show that the fact that a public announcement can polarize higher-order expectations implies that generating and disclosing more public information can destabilize the exchange rate system.