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Self-Fulfilling Risk Predictions

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Author Info

  • Robert P. Flood
  • Nancy P. Marion

Abstract

The paper shows that changing market beliefs about currency risk can generate a self-fulfilling speculative attack on a fixed exchange rate. The attack does not require a later change in policies to make it profitable. This is illustrated by introducing an endogenous risk premium into a “first-generation model” of a speculative attack. The model is further modified to take account of sterilization, debt-financed fiscal deficits, and anticipatory price-setting behavior. The model is used to interpret the 1994 Mexican peso crisis.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 98/124.

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Length: 34
Date of creation: 01 Aug 1998
Date of revision:
Handle: RePEc:imf:imfwpa:98/124

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Cited by:
  1. Leonidas E. De la Rosa, 1999. "Ataques Especulativos:Un Enfoque De Incertidumbre E Información," BORRADORES DE ECONOMIA 002033, BANCO DE LA REPÚBLICA.
  2. Nada Choueiri, 1999. "A Model of Contagious Currency Crises with Application to Argentina," IMF Working Papers 99/29, International Monetary Fund.
  3. Pasricha, Gurnain Kaur, 2006. "Survey of Literature on Covered and Uncovered Interest Parities," MPRA Paper 22737, University Library of Munich, Germany.

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