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Speculative attacks with unpredictable or unknown foreign exchange reserves

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  • Gregor W. Smith

Abstract

During a currency crisis, speculators usually do not know the value of a central bank's foreign exchange reserves. In this paper I show that modelling speculators as having imperfect knowledge of reserves enriches the predictions of the classical model of speculative attacks. With realistic lags in reserve reporting and costs to unsuccessful speculation, successful speculative attacks will involve a jump depreciation, unsuccessful attacks may occur, attacks may occur when fundamentals are improving, attacks may not be preceded by large increases in interest rates, and fixed exchange rates may be abandoned with no attack and no decline in the money supply.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 34 (2001)
Issue (Month): 4 (November)
Pages: 882-902

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Handle: RePEc:cje:issued:v:34:y:2001:i:4:p:882-902

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