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Defending against Speculative Attacks

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Author Info

  • Tijmen R. Daniels

    ()
    (Technische Universit�t 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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Web page: http://www.tinbergen.nl

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

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References

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  2. Christian Bauer & Philip Ernstberger, 2014. "The Dynamics of Currency Crises---Results from Intertemporal Optimization and Viscosity Solutions," Research Papers in Economics 2014-06, University of Trier, Department of Economics.
  3. Barbara Choros & Wolfgang Härdle & Ostap Okhrin, 2009. "CDO Pricing with Copulae," SFB 649 Discussion Papers SFB649DP2009-013, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  4. Daniëls, Tijmen R. & Dönges, Jutta & Heinemann, Frank, 2013. "Crossing network versus dealer market: Unique equilibrium in the allocation of order flow," European Economic Review, Elsevier, vol. 62(C), pages 41-57.
  5. Roland Strausz, 2009. "The Political Economy of Regulatory Risk," SFB 649 Discussion Papers SFB649DP2009-040, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  6. Busch, Ulrike & Nautz, Dieter, 2009. "Controllability and persistence of money market rates along the yield curve: evidence from the euro area," Discussion Papers 2009/5, Free University Berlin, School of Business & Economics.
  7. Michał Grajek & Lars-Hendrik R�ller, 2012. "Regulation and Investment in Network Industries: Evidence from European Telecoms," Journal of Law and Economics, University of Chicago Press, vol. 55(1), pages 189 - 216.
  8. Tijmen Daniëls & Henk Jager & Franc Klaassen, 2009. "Defending Against Speculative Attacks," SFB 649 Discussion Papers SFB649DP2009-011, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  9. Barbara Choroś & Wolfgang Härdle & Ostap Okhrin, 2009. "CDO and HAC," SFB 649 Discussion Papers SFB649DP2009-038, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  10. Tijmen Daniëls, 2009. "Unique Equilibrium in a Dynamic Model of Speculative Attacks," De Economist, Springer, vol. 157(4), pages 417-439, December.
  11. Stefan Ried, 2009. "Putting Up a Good Fight: The Galí-Monacelli Model versus “The Six Major Puzzles in International Macroeconomics”," SFB 649 Discussion Papers SFB649DP2009-020, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  12. 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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