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The Role of Domestic and Foreign Investors in a Simple Model of Speculative Attacks

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Author Info

  • Cees G. H. Diks
  • Dennis P. J. Botman

Abstract

We introduce local and foreign investors in a simple model of speculative attacks. Local investors have less tolerance for overvaluation of the fixed exchange rate because they tend to incur lower costs when taking a short position and possess better information, and because of moral hazard created by discriminatory government guarantees. On the other hand, the prospect of higher taxation after a balance of payments crisis deters speculation by locals compared to foreign investors. Finally, the lower the degree of exchange rate pass-through, the more likely domestic investors are tp take the lead during capital flight.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/205.

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Length: 24
Date of creation: 01 Oct 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/205

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Keywords: Taxation; Domestic investment; Economic models; Exchange rates; Foreign investment; exchange rate; investors; foreign investors; fixed exchange rate; exchange rate regime; fixed exchange rate regime; exchange rate pass; equilibrium exchange rate; international investors; home currency; foreign exchange reserves; foreign exchange; foreign currency; rate of return; exchange reserves; real rate of return; exchange rate changes; shadow exchange rate; private capital; rates of return; exchange rate increases; exchange rate depreciation; investment incentives; log exchange rate; international finance; nominal value; tax rate; floating exchange rate; fixed costs; external financing; private investment;

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References

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  1. Harsanyi, John C., 1994. "Games with Incomplete Information," Nobel Prize in Economics documents, Nobel Prize Committee 1994-1, Nobel Prize Committee.
  2. Caplin, Andrew & Leahy, John, 1994. "Business as Usual, Market Crashes, and Wisdom after the Fact," American Economic Review, American Economic Association, American Economic Association, vol. 84(3), pages 548-65, June.
  3. Morris, Stephen & Shin, Hyun Song, 1998. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, American Economic Association, American Economic Association, vol. 88(3), pages 587-97, June.
  4. Calvo, Guillermo A. & Mendoza, Enrique, 1997. "Rational Herd Behavior and the Globalization of Securities Markets," Working Papers, Duke University, Department of Economics 97-26, Duke University, Department of Economics.
  5. Hyuk Choe & Bong-Chan Kho & Rene M. Stulz, 2001. "Do Domestic Investors Have More Valuable Information About Individual Stocks Than Foreign Investors?," NBER Working Papers 8073, National Bureau of Economic Research, Inc.
  6. Kaufmann, Daniel & Mehrez, Gil & Schmukler, Sergio, 1999. "Predicting currency fluctuations and crises - do resident firms have an informational advantage?," Policy Research Working Paper Series 2259, The World Bank.
  7. Kim, Woochan & Wei, Shang-Jin, 2002. "Foreign portfolio investors before and during a crisis," Journal of International Economics, Elsevier, Elsevier, vol. 56(1), pages 77-96, January.
  8. Hirshleifer, David & Subrahmanyam, Avanidhar & Titman, Sheridan, 1994. " Security Analysis and Trading Patterns When Some Investors Receive Information before Others," Journal of Finance, American Finance Association, American Finance Association, vol. 49(5), pages 1665-98, December.
  9. Menzie D. Chinn & Kenneth M. Kletzer, 1999. "International capital inflows, domestic financial intermediation and financial crises under imperfect information," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Sep.
  10. Benabou, Roland & Laroque, Guy, 1992. "Using Privileged Information to Manipulate Markets: Insiders, Gurus, and Credibility," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(3), pages 921-58, August.
  11. Jonathan Eaton, 1987. "Public Debt Guarantees and Private Capital Flight," NBER Working Papers 2172, National Bureau of Economic Research, Inc.
  12. Devenow, Andrea & Welch, Ivo, 1996. "Rational herding in financial economics," European Economic Review, Elsevier, Elsevier, vol. 40(3-5), pages 603-615, April.
  13. Craig Burnside & Martin Eichenbaum & Sergio T. Rebelo, 2000. "On the Fundamentals of Self-Fulfilling Speculative Attacks," NBER Working Papers 7554, National Bureau of Economic Research, Inc.
  14. Mohsin S. Khan & Nadeem Ul Haque, 1985. "Foreign Borrowing and Capital Flight: A Formal Analysis (Emprunt extérieur et évasion de capitaux: analyse mathématique) (Endeudamiento externo y fuga de capitales: Un análisis formal)," IMF Staff Papers, Palgrave Macmillan, vol. 32(4), pages 606-628, December.
  15. Botman, Dennis P. J. & Jager, Henk, 2002. "Coordination of speculation," Journal of International Economics, Elsevier, Elsevier, vol. 58(1), pages 159-175, October.
  16. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 2002. "The Role of Large Players in Currency Crises," NBER Chapters, National Bureau of Economic Research, Inc, in: Preventing Currency Crises in Emerging Markets, pages 197-268 National Bureau of Economic Research, Inc.
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