Collapsing Exchange Rate Regimes: Another Linear Example
AbstractIn the literature on speculative attacks on a fixed exchange rate, it is usually assumed that the monetary authority responsible for fixing the exchange rate reacts passively to the monetary disruption caused by the attack. This assumption is grossly at odds with actual experience where monetary-base implications of the attacks are usually sterilized. Such sterilization renders the standard monetary-approach attack model unable to provide intellectual guidance to recent attack episodes. In this paper we describe the problems with the standard model and develop a version of the portfolio-balance exchange rate model that allows the study of episodes with sterilization. Sterilized attacks may be regarded as a laboratory test of the monetary versus portfolio-balance exchange rate models. The monetary model fails the test. These issues are motivated by reference to the December 1994 collapse of the Mexican peso.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5318.
Date of creation: Oct 1995
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Other versions of this item:
- Flood, Robert P. & Garber, Peter M. & Kramer, Charles, 1996. "Collapsing exchange rate regimes: Another linear example," Journal of International Economics, Elsevier, vol. 41(3-4), pages 223-234, November.
- F30 - International Economics - - International Finance - - - General
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
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