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11.2. A SECOND GENERATION MODEL 3430.020.0150.010.005-0.03 -0.02 -0.01 0.00 0.01 0.020-0.005Figure 11.3: Multiple equilibria devaluation thresholds.expected inßation (high δ e ) gets set into wages and the resulting wageinßation increases the pain from unemployment and makes devaluationmore likely. Devaluation is therefore more likely under the equilibriumthreshold ū 2 than ū 1 . When perceptions switch the economy to ū 2 ,theauthorities require a very favorable output shock in order to maintainthe exchange rate.There is not enough information in the model for us to say whichof the equilibrium thresholds the economy settles on. The model onlysuggests that random events can shift us from one equilibrium to another,moving from one where devaluation is viewed as unlikely to onein which it is more certain. Then, a relatively small output shock cansuddenly trigger a speculative attack and subsequent devaluation.