Speculative Attacks and the Information Role of the Interest Rate
AbstractThis paper models currency attacks as carried out by speculators who condition their actions on private signals about the state and on the market-clearing interest rate. Besides affecting speculators' payoffs, this interest rate also provides an endogenous public signal. For a plausible type of investment strategies, the dual role of the interest rate allows the model to explain abrupt and intense speculative attacks solely via economic fundamentals, without resorting to sunspot variables. This result underlies a novel policy implication: An official intervention in the foreign exchange market may reinforce a currency peg by influencing the precision of public information. (JEL: D82, D84, F31) (c) 2007 by the European Economic Association.
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Bibliographic InfoArticle provided by MIT Press in its journal Journal of the European Economic Association.
Volume (Year): 5 (2007)
Issue (Month): 1 (03)
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Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- F31 - International Economics - - International Finance - - - Foreign Exchange
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- Tijmen Daniëls & Henk Jager & Franc Klaassen, 2009.
"Defending Against Speculative Attacks,"
SFB 649 Discussion Papers
SFB649DP2009-011, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- Daniëls, Tijmen R. & Jager, Henk & Klaassen, Franc, 2011. "Currency crises with the threat of an interest rate defence," Journal of International Economics, Elsevier, vol. 85(1), pages 14-24, September.
- Prati, Alessandro & Sbracia, Massimo, 2010.
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- Prati, Alessandro & Sbracia, Massimo, 2010. "Uncertainty and Currency Crises: Evidence from Survey Data," MPRA Paper 21209, University Library of Munich, Germany.
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- Vives, Xavier, 2011. "Strategic Complementarity, Fragility, and Regulation," CEPR Discussion Papers 8444, C.E.P.R. Discussion Papers.
- Vives, Xavier, 2011. "Strategic complementarity, fragility, and regulation," IESE Research Papers D/928, IESE Business School.
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