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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

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2893.

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Date of creation: Jul 2001
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Handle: RePEc:cpr:ceprdp:2893

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Related research

Keywords: nominal anchor; optimizing BOP crises; speculative attacks;

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  1. Benabou, Roland, 1987. "Optimal price dynamics and speculation with a storable good," CEPREMAP Working Papers (Couverture Orange) 8708, CEPREMAP.
  2. Andersen, Torben M, 1994. "Shocks and the Viability of a Fixed Exchange Rate Commitment," CEPR Discussion Papers 969, C.E.P.R. Discussion Papers.
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  5. Flood, Robert & Marion, Nancy, 1999. "Perspectives on the Recent Currency Crisis Literature," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(1), pages 1-26, January.
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  7. 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.
  8. Ozkan, F Gulcin & Sutherland, Alan, 1994. "A Model of the ERM Crisis," CEPR Discussion Papers 879, C.E.P.R. Discussion Papers.
  9. Pablo Emilio Guidotti & Carlos A. Végh Gramont, 1992. "Losing Credibility: The Stabilization Blues," IMF Working Papers 92/73, International Monetary Fund.
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  11. 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.
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  14. Velasco, Andres, 1997. "When are fixed exchange rates really fixed?," Journal of Development Economics, Elsevier, vol. 54(1), pages 5-25, October.
  15. 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.
  16. 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.
  17. Maurice Obstfeld, 1986. "Rational and Self-Fulfilling Balance-of-Payments Crises," NBER Working Papers 1486, National Bureau of Economic Research, Inc.
  18. 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.
  19. Jeanne, Olivier, 1997. "Are currency crises self-fulfilling?: A test," Journal of International Economics, Elsevier, vol. 43(3-4), pages 263-286, November.
  20. 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. 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.
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Citations

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Cited by:
  1. Bernardo Guimaraes, 2008. "Vulnerability of Currency Pegs: Evidence from Brazil," CEP Discussion Papers dp0871, Centre for Economic Performance, LSE.
  2. 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.
  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. Sweder van Wijnbergen & Christiaan van der Kwaak, 2014. "Financial Fragility and the Fiscal Multiplier," Tinbergen Institute Discussion Papers 14-004/VI, Tinbergen Institute.
  5. Gara Minguez-Afonso, 2007. "Imperfect Common Knowledge in First-Generation Models of Currency Crises," International Journal of Central Banking, International Journal of Central Banking, vol. 3(1), pages 81-112, March.
  6. 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.
  7. Fernando A Broner, 2006. "Discrete Devaluations and Multiple Equilibria in a First Generation Model of Currency Crises," Working Papers 309, Barcelona Graduate School of Economics.
  8. Bernardo Guimaraes, 2005. "Market Expectations and Currency Crises: Theory and Empirics," 2005 Meeting Papers 174, Society for Economic Dynamics.
  9. Tullio Gregori, 2009. "Currency crisis duration and interest defence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(3), pages 256-267.
  10. Guimaraes, Bernardo, 2006. "Dynamics of currency crises with asset market frictions," Journal of International Economics, Elsevier, vol. 68(1), pages 141-158, January.
  11. repec:dgr:uvatin:2011064 is not listed on IDEAS
  12. Guimarães, Bernardo, 2007. "Currency Crisis Triggers: Sunspots or Thresholds?," CEPR Discussion Papers 6487, C.E.P.R. Discussion Papers.

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