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

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

Author Info

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

Additional information is available for the following registered author(s):

Cees Diks

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

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Length: 24 pages
Date of creation: 03 Nov 2005
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Handle: RePEc:imf:imfwpa:05/205

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This paper has been announced in the following NEP Reports:

NEP-ALL-2006-03-05 (All new papers)
NEP-FMK-2006-03-05 (Financial Markets)

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