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The Choice of Exchange-Rate Regime and Speculative Attacks

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Author Info

  • Alex Cukierman

    (Tel Aviv University and Tilburg University,)

  • Itay Goldstein

    (Wharton School, University of Pennsylvania,)

  • Yossi Spiegel

    (Tel Aviv University,)

Abstract

We develop a framework that makes it possible to study, for the first time, the strategic interac-tion between the ex ante choice of exchange-rate regime and the likelihood of ex post currency attacks. The optimal regime is determined by a policymaker who trades off the loss from nom-inal exchange-rate uncertainty against the cost of adopting a given regime. This cost increases, in turn, with the fraction of speculators who attack the local currency. Searching for the optimal regime within the class of exchange-rate bands, we show that the optimal regime can be either a peg (a zero-width band), a free float (an infinite-width band), or a nondegenerate band of finite width. We study the effect of several factors on the optimal regime and on the probability of currency attacks. In particular, we show that a Tobin tax induces policymakers to set less flexible regimes. In our model, this generates an increase in the probability of currency attacks. (JEL: F31, D84) Copyright (c) 2004 by the European Economic Association.

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Bibliographic Info

Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 2 (2004)
Issue (Month): 6 (December)
Pages: 1206-1241

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Handle: RePEc:tpr:jeurec:v:2:y:2004:i:6:p:1206-1241

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References

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Citations

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Cited by:
  1. Agnès Bénassy-Quéré & Benoit Coeuré, 2002. "The Survival of Intermediate Exchange Rate Regimes," Working Papers 2002-07, CEPII research center.
  2. Christian Basteck & Tijmen R. Daniëls & Frank Heinemann, 2010. "Characterising Equilibrium Selection in Global Games with Strategic Complementarities," SFB 649 Discussion Papers SFB649DP2010-008, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  3. Tijmen Daniëls & Henk Jager & Franc Klaassen, 2009. "Defending Against Speculative Attacks," SFB 649 Discussion Papers SFB649DP2009-011, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  4. Pathak, Parag & Tirole, Jean, 2006. "Speculative Attacks and Risk Management," IDEI Working Papers 438, Institut d'Économie Industrielle (IDEI), Toulouse.
  5. Iljoong Kim & Inbae Kim, 2005. "Endogenous changes in the exchange rate regime: A bureaucratic incentive model," Public Choice, Springer, vol. 125(3), pages 339-361, December.

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