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Speculative Attacks: Fundamentals and Self-Fulfilling Prophecies

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  • Robert P. Flood
  • Nancy P. Marion

Abstract

We develop a modified understand better the 1994 Mexican peso crisis as well as aspects of the European currency crises in 1992-93. We introduce the assumption that the speculative attack is sterilized by the domestic monetary authority, we incorporate a stochastic risk premium, and we allow for some price stickiness. The modified model shows that macroeconomic policies inconsistent in the longer run with a fixed exchange rate can push the economy inevitably towards a currency crisis, but it also demonstrates how a government currently following consistent macroeconomic policies can suddenly face a speculative attack triggered by a large shift in speculative opinion. However, the ability of a sudden shift in speculative opinion to trigger an attack is bounded by the position of fundamentals. Thus an attack does not require a later change in policies to make it profitable.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5789.

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Date of creation: Oct 1996
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Handle: RePEc:nbr:nberwo:5789

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  8. Pierre-Richard Agenor & Jagdeep S. Bhandari & Robert P. Flood, 1991. "Speculative Attacks and Models of Balance-of-Payments Crises," NBER Working Papers 3919, National Bureau of Economic Research, Inc.
  9. Pierre-Richard Agénor & Jagdeep S. Bhandari & Robert P. Flood, 1992. "Speculative Attacks and Models of Balance of Payments Crises," IMF Staff Papers, Palgrave Macmillan, vol. 39(2), pages 357-394, June.
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Cited by:
  1. Masson, Paul, 1999. "Contagion:: macroeconomic models with multiple equilibria," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 587-602, August.
  2. Mundaca, Gabriela, 2003. "A Drift of the "Drift Adjustment Method"," Memorandum 16/2002, Oslo University, Department of Economics.
  3. Dominick Salvatore, 1998. "International Monetary and Financial Arrangements: Present and Future," Open Economies Review, Springer, vol. 9(1), pages 375-416, January.
  4. Michael P. Dooley, 1997. "Financial Liberalization and Policy Challenges," Research Department Publications 4102, Inter-American Development Bank, Research Department.
  5. Cavallari, Lilia & Corsetti, Giancarlo, 2000. "Shadow rates and multiple equilibria in the theory of currency crises," Journal of International Economics, Elsevier, vol. 51(2), pages 275-286, August.
  6. Olivier Jeanne & Andrew K. Rose, 1999. "Noise Trading and Exchange Rate Regimes," NBER Working Papers 7104, National Bureau of Economic Research, Inc.
  7. Jeffrey A. Frankel & Shang-Jin Wei, 2004. "Managing Macroeconomic Crises," NBER Working Papers 10907, National Bureau of Economic Research, Inc.
  8. Ayala, Alfonso, 2011. "Una introducción a los modelos de crisis financieras
    [A introduction to models financial crisis]
    ," MPRA Paper 42411, University Library of Munich, Germany.
  9. Arias, Guillaume & Erlandsson, Ulf, 2004. "Regime switching as an alternative early warning system of currency crises - an application to South-East Asia," Working Papers 2004:11, Lund University, Department of Economics.
  10. Michael P. Dooley, 1997. "Apertura financiera y retos de políticas," Research Department Publications 4103, Inter-American Development Bank, Research Department.
  11. Paul R. Masson, 1998. "Contagion-Monsoonal Effects, Spillovers, and Jumps Between Multiple Equilibria," IMF Working Papers 98/142, International Monetary Fund.
  12. Gulbin Sahinbeyoglu, 2001. "Monetary Transmission Mechanism : A View From A High Inflationary Environment," Discussion Papers 0101, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  13. Bordo, Michael D. & Choudhri, Ehsan U. & Schwartz, Anna J., 2002. "Was Expansionary Monetary Policy Feasible during the Great Contraction? An Examination of the Gold Standard Constraint," Explorations in Economic History, Elsevier, vol. 39(1), pages 1-28, January.
  14. Jeanne, Olivier, 1999. "Currency Crises: A Perspective on Recent Theoretical Developments," CEPR Discussion Papers 2170, C.E.P.R. Discussion Papers.
  15. Marcel Fratzscher, 1998. "Why are currency crises contagious? A comparison of the Latin American Crisis of 1994–1995 and the Asian Crisis of 1997–1998," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 134(4), pages 664-691, December.
  16. Mundaca,B.G. & Strand,J., 1999. "Speculative attacks in the exchange market with a band policy : a sequential game analysis," Memorandum 01/1999, Oslo University, Department of Economics.
  17. Shankar, Rashmi, 2002. "Distinguishing between observationally equivalent theories of crises," Policy Research Working Paper Series 2926, The World Bank.
  18. Sheriffdeen A. Tella & Olumuyiwa G. Yinusa & Ayinde Taofeek Olusola & Saban Celik, 2011. "Global Economic Crisis And Stock Markets Efficiency: Evidence From Selected Africa Countries," Bogazici Journal of Economics and Administrative Sciences, Bogazici University, Department of Economics, vol. 25(1), pages 139-169.

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