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Speculation and the decision to abandon a fixed exchange rate regime

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  • Pastine, Ivan

Abstract

This Paper demonstrates that the implications of first-generation speculative attack models do not hold if there is a rational, forward-looking policy maker. The policy maker will be able to avoid predictable speculative attacks by introducing uncertainty into the decisions of speculators. This changes the sudden attack into a prolonged period of increasing speculation and uncertainty. In addition, the model provides useful insights into the viability of temporary nominal anchor policies, and a theoretical foundation for a useful empirical methodology.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 57 (2002)
Issue (Month): 1 (June)
Pages: 197-229

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Handle: RePEc:eee:inecon:v:57:y:2002:i:1:p:197-229

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Web page: http://www.elsevier.com/locate/inca/505552

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  1. Ozkan, F Gulcin & Sutherland, Alan, 1995. "Policy Measures to Avoid a Currency Crisis," Economic Journal, Royal Economic Society, vol. 105(429), pages 510-19, March.
  2. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
  3. F Gulcin Ozkan & Alan Sutherland, . "A Model of the ERM Crisis," Discussion Papers 94/2, Department of Economics, University of York.
  4. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  5. Leo K. Simon and Maxwell B. Stinchcombe., 1987. "Extensive Form Games in Continuous Time: Pure Strategies," Economics Working Papers 8746, University of California at Berkeley.
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  7. Gulcin Ozkan & Alan Sutherland, . "A Currency Crisis Model with an Optimising Policymaker," Discussion Papers 96/11, Department of Economics, University of York.
  8. Morris, S & Song Shin, H, 1996. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," Economics Papers 126, Economics Group, Nuffield College, University of Oxford.
  9. Robert Flood & Nancy Marion, 1998. "Perspectives on the Recent Currency Crisis Literature," NBER Working Papers 6380, National Bureau of Economic Research, Inc.
  10. Robert P. Flood & Peter M. Garber, 1981. "Gold monetization and gold discipline," International Finance Discussion Papers 190, Board of Governors of the Federal Reserve System (U.S.).
  11. Cole, Harold L. & Kehoe, Timothy J., 1996. "A self-fulfilling model of Mexico's 1994-1995 debt crisis," Journal of International Economics, Elsevier, vol. 41(3-4), pages 309-330, November.
  12. Velasco, Andres, 1997. "When are fixed exchange rates really fixed?," Journal of Development Economics, Elsevier, vol. 54(1), pages 5-25, October.
  13. Stephen W. Salant & Dale W. Henderson, 1976. "Market anticipations, government policy, and the price of gold," International Finance Discussion Papers 81, Board of Governors of the Federal Reserve System (U.S.).
  14. Jeanne, Olivier, 1997. "Are currency crises self-fulfilling?: A test," Journal of International Economics, Elsevier, vol. 43(3-4), pages 263-286, November.
  15. Obstfeld, Maurice, 1986. "Rational and Self-fulfilling Balance-of-Payments Crises," American Economic Review, American Economic Association, vol. 76(1), pages 72-81, March.
  16. Davies, Gareth & Vines, David, 1995. "Equilibrium Currency Crises: Are Multiple Equilibria Self-fulfilling or History Dependent?," CEPR Discussion Papers 1239, C.E.P.R. Discussion Papers.
  17. Pablo E. Guidotti & Carlos A. Végh, 1997. "Losing Credibility: The Stabilization Blues," CEMA Working Papers: Serie Documentos de Trabajo. 122, Universidad del CEMA.
  18. Pierre-Richard Agénor & Jagdeep S. Bhandari & Robert P. Flood, 1992. "Speculative Attacks and Models of Balance of Payments Crises," IMF Staff Papers, Palgrave Macmillan, vol. 39(2), pages 357-394, June.
  19. Benabou, Roland, 1989. "Optimal Price Dynamics and Speculation with a Storable Good," Econometrica, Econometric Society, vol. 57(1), pages 41-80, January.
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  22. Ivan Pastine, 2000. "Devaluation of fixed exchange rates: optimal strategy in the presence of speculation," Economic Theory, Springer, vol. 15(3), pages 631-661.
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  24. Flood, Robert P. & Garber, Peter M. & Kramer, Charles, 1996. "Collapsing exchange rate regimes: Another linear example," Journal of International Economics, Elsevier, vol. 41(3-4), pages 223-234, November.
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Citations

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Cited by:
  1. Guimarães, Bernardo, 2007. "Currency Crisis Triggers: Sunspots or Thresholds?," CEPR Discussion Papers 6487, C.E.P.R. Discussion Papers.
  2. Bernardo Guimaraes, 2008. "Vulnerability of currency pegs: evidence from Brazil," LSE Research Online Documents on Economics 4909, London School of Economics and Political Science, LSE Library.
  3. Yuk-shing CHENG & Chi-shing CHAN & Chor-yiu SIN, 2004. "Currency attack/defense with two-sided private information," Econometric Society 2004 Far Eastern Meetings 395, Econometric Society.
  4. repec:dgr:uvatin:2011064 is not listed on IDEAS
  5. Sweder van Wijnbergen & Christiaan van der Kwaak, 2014. "Financial Fragility and the Fiscal Multiplier," Tinbergen Institute Discussion Papers 14-004/VI/DSF70, Tinbergen Institute.
  6. Broner, Fernando A, 2006. "Discrete Devaluations and Multiple Equilibria in a First Generation Model of Currency Crises," CEPR Discussion Papers 5876, C.E.P.R. Discussion Papers.
  7. Gara Minguez Afonso, 2006. "Imperfect Common Knowledge in First Generation Models of Currency Crises," FMG Discussion Papers dp555, Financial Markets Group.
  8. Wang, Jian, 2010. "Home bias, exchange rate disconnect, and optimal exchange rate policy," Journal of International Money and Finance, Elsevier, vol. 29(1), pages 55-78, February.
  9. Bernardo Guimaraes, 2005. "Market Expectations and Currency Crises: Theory and Empirics," 2005 Meeting Papers 174, Society for Economic Dynamics.
  10. Gara Minguez-Afonso, 2006. "Imperfect common knowledge in first generation models of currency crises," LSE Research Online Documents on Economics 24509, London School of Economics and Political Science, LSE Library.
  11. Guimaraes, Bernardo, 2006. "Dynamics of currency crises with asset market frictions," Journal of International Economics, Elsevier, vol. 68(1), pages 141-158, January.
  12. Tullio Gregori, 2009. "Currency crisis duration and interest defence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(3), pages 256-267.

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