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Currency crisis duration and interest defence

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Author Info
Tullio Gregori (Dipartimento di Scienze Economiche e Statistiche, Università degli Studi di Trieste, Italy)
Abstract

Asymmetric wars of attrition between speculators and a Central Bank can provide a useful framework to address currency crisis length and explain why a speculative attack can fail after some time. Interest rate defence can be analysed too. A non-linear relationship between interest rates and peg defence emerges, as a rate upsurge can reduce both concession times. With some welfare loss functions, increasing the domestic rate too much is a self-defeating policy as the Central Bank will opt out before speculators concede, but the reverse holds for lower rates. Copyright © 2008 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/ijfe.372
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Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 14 (2009)
Issue (Month): 3 ()
Pages: 256-267
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Handle: RePEc:ijf:ijfiec:v:14:y:2009:i:3:p:256-267

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  1. Roberto Chang & Andres Velasco, 1998. "Financial crises in emerging markets: a canonical model," Working Paper 98-10, Federal Reserve Bank of Atlanta. [Downloadable!]
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  2. Allsopp, Louise, 2000. "A Model to Explain the Duration of a Currency Crisis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 5(4), pages 331-37, October. [Downloadable!] (restricted)
  3. Kraay, Aart, 2003. "Do high interest rates defend currencies during speculative attacks?," Journal of International Economics, Elsevier, vol. 59(2), pages 297-321, March. [Downloadable!] (restricted)
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  4. 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. [Downloadable!] (restricted)
  5. Allan Drazen, 2003. "Interest Rate Defense against Speculative Attack as a Signal. A Primer," NBER Chapters, in: Managing Currency Crises in Emerging Markets, pages 37-60 National Bureau of Economic Research, Inc. [Downloadable!]
  6. 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. [Downloadable!] (restricted)
  7. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Amartya Lahiri & Carlos A. Vegh, 2003. "Delaying the Inevitable: Interest Rate Defense and Balance of Payments Crises," Journal of Political Economy, University of Chicago Press, vol. 111(2), pages 404-424, April. [Downloadable!] (restricted)
  9. Alesina, A. & Drazen, A., 1991. "Why Are Stabilizations Delayed?," Papers 6-91, Tel Aviv - the Sackler Institute of Economic Studies.
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  10. Drazen, Allan & Hubrich, Stefan, 2003. "Mixed Signals in Defending the Exchange Rate: What do the Data Say?," CEPR Discussion Papers 4050, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. Maurice Obstfeld, 1986. "Rational and Self-Fulfilling Balance-of-Payments Crises," NBER Working Papers 1486, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Ponsati, Clara & Sakovics, Jozsef, 1995. "The war of attrition with incomplete information," Mathematical Social Sciences, Elsevier, vol. 29(3), pages 239-254, June. [Downloadable!] (restricted)
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  13. Pastine, Ivan, 2002. "Speculation and the decision to abandon a fixed exchange rate regime," Journal of International Economics, Elsevier, vol. 57(1), pages 197-229, June. [Downloadable!] (restricted)
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  14. Derrick Reagle & Dominick Salvatore, 2000. "Forecasting Financial Crises in Emerging Market Economies," Open Economies Review, Springer, vol. 11(3), pages 247-259, July. [Downloadable!] (restricted)
  15. Fudenberg, Drew & Tirole, Jean, 1986. "A Theory of Exit in Duopoly," Econometrica, Econometric Society, vol. 54(4), pages 943-60, July. [Downloadable!] (restricted)
  16. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 2001. "The Role of Large Players in Currency Crises," NBER Working Papers 8303, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  17. Bensaid, Bernard & Jeanne, Olivier, 1997. "The instability of fixed exchange rate systems when raising the nominal interest rate is costly," European Economic Review, Elsevier, vol. 41(8), pages 1461-1478, August. [Downloadable!] (restricted)
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  18. Drazen, Allan, 2000. "Interest-rate and borrowing defense against speculative attack," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 53(1), pages 303-348, December. [Downloadable!] (restricted)
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