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Defending against Speculative Attacks

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  • Tijmen R. Daniels

    () (Technische Universität Berlin)

  • Henk Jager

    () (University of Amsterdam)

  • Franc Klaassen

    () (University of Amsterdam)

Abstract

While virtually all modern models of exchange rate crises recognise that the decision to abandon an exchange rate peg depends on how harshly policy makers are willing to defend the regime, they virtually never model how the exchange rate is defended. In this paper we incorporate both the mechanics of speculation and a defence policy against speculation in the well-known currency crisis model of Morris and Shin (American Economic Review 88 (1998) 587-97). After adding these natural elements, our model outperforms standard currency crisis models at explaining stylised features of speculative attacks. Moreover, our model connects the theoretical currency crisis literature to an empirical literature on exchange market pressure, by bringing together its building blocks: exchange rate changes plus counter-acting defence policies. We use this connection to confirm our model's predictions empirically.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 08-090/2.

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Date of creation: 22 Sep 2008
Date of revision: 06 Apr 2009
Handle: RePEc:dgr:uvatin:20080090

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Related research

Keywords: Exchange Market Pressure; Currency Crisis; Global Game;

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References

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Citations

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Cited by:
  1. Roland Strausz, 2010. "The Political Economy of Regulatory Risk," CESifo Working Paper Series 2953, CESifo Group Munich.
  2. Michal Grajek & Lars-Hendrik Röller, 2009. "Regulation and Investment in Network Industries: Evidence from European Telecoms," ESMT Research Working Papers ESMT-09-004, ESMT European School of Management and Technology.
  3. Barbara Choroś & Wolfgang Härdle & Ostap Okhrin, 2009. "CDO and HAC," SFB 649 Discussion Papers SFB649DP2009-038, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  4. Tijmen Daniëls, 2009. "Unique Equilibrium in a Dynamic Model of Speculative Attacks," De Economist, Springer, vol. 157(4), pages 417-439, December.
  5. Maria Grith & Wolfgang Härdle & Juhyun Park, 2009. "Shape invariant modelling pricing kernels and risk aversion," SFB 649 Discussion Papers SFB649DP2009-041, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

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