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Speculative Attacks and the Dynamics of Exchange Rates

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  • Stephen J. Turnovsky

    (University of Washington)

  • Jian Xu

    (Kenyon College)

Abstract

This paper examines the issue of speculative attacks on the exchange rate in an economy in which. following the attack the government allows the exchange rate to float for a limited period, before repegging it at a higher, sustainable, level. We highlight the tradeoffs between the length of the floating rate period and the timing of the speculative attack, and the implied consequences for the time paths of the exchange rate and consumption. By letting the exchange rate float for an appropriate period, the exchange rate crisis can be delayed for a maximum period of time, although delaying the crisis as long as possible is non-optimal. In some respects our results are qualitatively similar to earlier results based on non-optimizing models, although employing a rational intertemporal optimizing framework substantially enhances our understanding of the determinants of the crises.

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Bibliographic Info

Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 3 (2002)
Issue (Month): 2 (November)
Pages: 219-248

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Handle: RePEc:cuf:journl:y:2002:v:3:i:2:p:219-248

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Related research

Keywords: Speculative attacks; Exchange rates; Dynamcics;

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References

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  1. Salant, Stephen W & Henderson, Dale W, 1978. "Market Anticipations of Government Policies and the Price of Gold," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(4), pages 627-48, August.
  2. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 8(3), pages 387-393.
  3. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, Elsevier, vol. 10(3), pages 335-359.
  4. Willman, Alpo, 1988. "The collapse of the fixed exchange rate regime with sticky wages and imperfect substitutability between domestic and foreign bonds," European Economic Review, Elsevier, Elsevier, vol. 32(9), pages 1817-1838, November.
  5. Maurice Obstfeld, 1984. "Rational and Self-Fulfilling Balance-of-Payments Crises," NBER Working Papers 1486, National Bureau of Economic Research, Inc.
  6. Stephen W. Salant & Dale W. Henderson, 1976. "Market anticipations, government policy, and the price of gold," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 81, Board of Governors of the Federal Reserve System (U.S.).
  7. Dellas, H. & Stockman, A.C., 1988. "Self-Fullfilling Expectations, Speculative Attacks And Capital Controls," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 138, University of Rochester - Center for Economic Research (RCER).
  8. Nancy P. Marion & Robert P. Flood, 1998. "Perspectiveson the Recent Currency Crisis Literature," IMF Working Papers, International Monetary Fund 98/130, International Monetary Fund.
  9. Robert P. Flood & Peter M. Garber & Charles Kramer, 1995. "Collapsing Exchange Rate Regimes: Another Linear Example," NBER Working Papers 5318, National Bureau of Economic Research, Inc.
  10. Connolly, Michael B & Taylor, Dean, 1984. "The Exact Timing of the Collapse of an Exchange Rate Regime and Its Impact on the Relative Price of Traded Goods," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 16(2), pages 194-207, May.
  11. Stephen J. Turnovsky, 1997. "International Macroeconomic Dynamics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262201119, December.
  12. Calvo, Guillermo A, 1987. "Balance of Payments Crises in a Cash-in-Advance Economy," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 19(1), pages 19-32, February.
  13. Obstfeld, Maurice, 1984. "Balance-of-Payments Crises and Devaluation," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 16(2), pages 208-17, May.
  14. Otker, Inci & Pazarbasioglu, Ceyla, 1997. "Speculative attacks and macroeconomic fundamentals: evidence from some European currencies," European Economic Review, Elsevier, Elsevier, vol. 41(3-5), pages 847-860, April.
  15. Robert P. Flood & Peter M. Garber, 1982. "A model of stochastic process switching," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 201, Board of Governors of the Federal Reserve System (U.S.).
  16. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, Elsevier, vol. 17(1-2), pages 1-13, August.
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