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Defending Against Speculative Attacks

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  • Tijmen Daniëls
  • Henk Jager
  • Franc Klaassen

Abstract

While virtually all currency crisismodels recognise that the fate of a currency peg depends on how tenaciously policy makers defend it, they seldom model how this is done. We incorporate themechanics of speculation and the interest rate defence against it in the model ofMorris and Shin (American Economic Review 88, 1998). Our model captures that the interest rate defence reduces speculators’ profits and thus postpones the crisis. It predicts that well before the fall of a currency interest rates are increased to offset the buildup of exchange market pressure, and this then unravels in a sharp depreciation. This pattern is at odds with predictions of standard models, but we show that it fits well with reality.

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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2009-011.

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Length: 34 pages
Date of creation: Feb 2009
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Handle: RePEc:hum:wpaper:sfb649dp2009-011

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Keywords: Exchange Market Pressure; Currency Crisis; Interest Rate Defence; Global Game;

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References

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Citations

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Cited by:
  1. Tijmen Daniëls & Henk Jager & Franc Klaassen, 2009. "Defending Against Speculative Attacks," SFB 649 Discussion Papers SFB649DP2009-011, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  2. Tijmen Daniëls, 2009. "Unique Equilibrium in a Dynamic Model of Speculative Attacks," De Economist, Springer, Springer, vol. 157(4), pages 417-439, December.
  3. 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, Elsevier, vol. 62(C), pages 41-57.
  4. Hanewald, Katja & Post, Thomas & Gründl, Helmut, 2011. "Stochastic mortality, macroeconomic risks, and life insurer solvency," ICIR Working Paper Series 01/11, International Center for Insurance Regulation (ICIR), Goethe University Frankfurt.
  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.
  6. Barbara Choroś & Wolfgang Härdle & Ostap Okhrin, 2009. "CDO and HAC," SFB 649 Discussion Papers SFB649DP2009-038, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  7. 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.
  8. 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.
  9. Roland Strausz, 2010. "The Political Economy of Regulatory Risk," CESifo Working Paper Series 2953, CESifo Group Munich.
  10. Ulrike Busch & Dieter Nautz, 2010. "Controllability and Persistence of Money Market Rates along the Yield Curve: Evidence from the Euro Area," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 11, pages 367-380, 08.
  11. Barbara Choros & Wolfgang Härdle & Ostap Okhrin, 2009. "CDO Pricing with Copulae," SFB 649 Discussion Papers SFB649DP2009-013, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  12. 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.

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