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Speculative Attacks, Forward Market Intervention and the Classic Bear Squeeze

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  • Subir Lall

Abstract

A typical strategy used by speculators to launch an attack on a fixed exchange regime is the use of forward markets. Central banks also intervene in forward markets to counter speculation. This paper addresses the question of how an attack is launched on the forward market, and what the optimal policy response to such speculation is in the forward and spot markets. The paper also demonstrates how central banks can impose a bear squeeze on speculators. Recent events in South East Asian currency markets are interpreted within the framework of the model’s predictions.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 97/164.

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Length: 37
Date of creation: 01 Dec 1997
Date of revision:
Handle: RePEc:imf:imfwpa:97/164

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Cited by:
  1. Woosik Moon & Yeongseop Rhee, 2006. "Spot and foward market intervention during the 1997 Korean currency crisis," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, Banca Nazionale del Lavoro, vol. 59(238), pages 243-268.
  2. Tijmen Daniëls & Henk Jager & Franc Klaassen, 2009. "Defending Against Speculative Attacks," SFB 649 Discussion Papers SFB649DP2009-011, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  3. Dodd, Randall, 2002. "Derivatives, the Shape of International Capital Flows and the Virtues of Prudential Regulation," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  4. Pichit Phatrawimolporn & Teeraphol Rattanalungkarn, 2001. "Open Market Operation & Effectiveness of Monetary Policy," Working Papers, Economic Research Department, Bank of Thailand 2001-01, Economic Research Department, Bank of Thailand.
  5. Sujit Chakravorti & Subir Lall, 2000. "The double play: simultaneous speculative attacks on currency and equity markets," Working Paper Series, Federal Reserve Bank of Chicago WP-00-17, Federal Reserve Bank of Chicago.
  6. Bacha, Obiyathulla I., 1997. "The Asian Currency Crisis - A Fait Accompli?," MPRA Paper 12756, University Library of Munich, Germany.
  7. Jorge Iván Canales Kriljenko & Cem Karacadag & Roberto Pereira Guimarães, 2003. "Official Intervention in the Foreign Exchange Market," IMF Working Papers, International Monetary Fund 03/152, International Monetary Fund.
  8. Herman Kamil, 2008. "Is Central Bank Intervention Effective Under Inflation Targeting Regimes? the Case of Colombia," IMF Working Papers, International Monetary Fund 08/88, International Monetary Fund.
  9. Kraay, Aart, 2003. "Do high interest rates defend currencies during speculative attacks?," Journal of International Economics, Elsevier, Elsevier, vol. 59(2), pages 297-321, March.
  10. Woosik Moon & Yeongseop Rhee, 2006. "Spot and foward market intervention during the 1997 Korean currency crisis," BNL Quarterly Review, Banca Nazionale del Lavoro, Banca Nazionale del Lavoro, vol. 59(238), pages 243-268.

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