Rational and Self-fulfilling Balance-of-Payments Crises
AbstractSpeculative attacks on a pegged exchange rate must sometimes occur ifasset-price paths are to be free of abnormal profit opportunities. Suchattacks are fully rational, as they reflect the market's response to aregime breakdown that is inevitable. The authors shows that under someexpectations about policy, balance-of-payments crises can also be purely self-fulfilling events. In such cases even a permanently viableregime may collapse, and the economy will possess multiple equilibriacorresponding to different subjective assessments of the probability ofa crisis. The behavior of the domestic interest rate will naturally reflect the possibility of a speculative attack. Copyright 1986 by American Economic Association.
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Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Review.
Volume (Year): 76 (1986)
Issue (Month): 1 (March)
Other versions of this item:
- Maurice Obstfeld, 1986. "Rational and Self-Fulfilling Balance-of-Payments Crises," NBER Working Papers 1486, National Bureau of Economic Research, Inc.
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