Borrowing to defend the exchange rate and the timing and magnitude of speculative attacks
AbstractThe paper extends the recent literature on collapsing managed exchange rate regimes by allowing explicitly for the qovernment budget constraint and the interest cost of servicing the public debt. The policy experivent that is analysed is the decision by a government to replenish its stock of foreign exchange reserve through a once-off open market sale of bonds. Without a fundanental fiscal correction (i.e. a decision to reduce the primary (non-interest) deficit by an amount equal to the increase in the interest cost of servicing the debt) the conseqinces are as follows. In a deterministic model the timing of the speculative attack is brought forward (delayed) if the borrowing takes place long before (close to) the date at which without borrowing the collapse would have occurred. The magnitude of the attack (the final loss of reserves) always increases because of borrowing. In a stochastic model, borrowing reduces the probability of an early collapse and increases the likelihood of a later collapse. Under mild conditions, the expected length of the time interval until the collapse occus is increased by borrowing.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Economics.
Volume (Year): 23 (1987)
Issue (Month): 3-4 (November)
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Web page: http://www.elsevier.com/locate/inca/505552
Other versions of this item:
- Buiter, Willem H, 1986. "Borrowing to Defend the Exchange Rate and the Timing and Magnitude of Speculative Attacks," CEPR Discussion Papers 95, C.E.P.R. Discussion Papers.
- Willem H. Buiter, 1988. "Borrowing to Defend the Exchange Rate and the Timing and Magnitude of Speculative Attacks," NBER Working Papers 1844, National Bureau of Economic Research, Inc.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Maurice Obstfeld, 1984.
"Balance-of-Payments Crises and Devaluation,"
NBER Working Papers
1103, National Bureau of Economic Research, Inc.
- Diamond, Douglas W & Dybvig, Philip H, 1983.
"Bank Runs, Deposit Insurance, and Liquidity,"
Journal of Political Economy,
University of Chicago Press, vol. 91(3), pages 401-19, June.
- Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
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