Borrowing to Defend the Exchange Rate and the Timing and Magnitude of Speculative Attacks
AbstractThe paper extends the recent literature on collapsing managed exchange rate regimes by allowing explicitly for the qovernment budget constraint and the interest cost of servicing the public debt. The policy experivent that is analysed is the decision by a government to replenish its stock of foreign exchange reserve through a once-off open market sale of bonds. Without a fundanental fiscal correction (i.e. a decision to reduce the primary (non-interest) deficit by an amount equal to the increase in the interest cost of servicing the debt) the conseqinces are as follows. In a deterministic model the timing of the speculative attack is brought forward (delayed) if the borrowing takes place long before (close to) the date at which without borrowing the collapse would have occurred. The magnitude of the attack (the final loss of reserves) always increases because of borrowing. In a stochastic model, borrowing reduces the probability of an early collapse and increases the likelihood of a later collapse. Under mild conditions, the expected length of the time interval until the collapse occus is increased by borrowing.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1844.
Date of creation: Jan 1988
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Other versions of this item:
- Buiter, Willem H., 1987. "Borrowing to defend the exchange rate and the timing and magnitude of speculative attacks," Journal of International Economics, Elsevier, vol. 23(3-4), pages 221-239, November.
- Buiter, Willem H, 1986. "Borrowing to Defend the Exchange Rate and the Timing and Magnitude of Speculative Attacks," CEPR Discussion Papers 95, C.E.P.R. Discussion Papers.
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- Maurice Obstfeld, 1984.
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- Diamond, Douglas W & Dybvig, Philip H, 1983.
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University of Chicago Press, vol. 91(3), pages 401-19, June.
- Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
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