Collapsing exchange rate regimes: Another linear example
In 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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- Obstfeld, Maurice, 1986.
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- Blackburn, Keith, 1988. "Collapsing exchange rate regimes and exchange rate dynamics: Some further examples," Journal of International Money and Finance, Elsevier, vol. 7(4), pages 373-385.
- Blanco, Herminio & Garber, Peter M, 1986. "Recurrent Devaluation and Speculative Attacks on the Mexican Peso," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 148-166, February.
- Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
- Willman, Alpo, 1988. "The collapse of the fixed exchange rate regime with sticky wages and imperfect substitutability between domestic and foreign bonds," European Economic Review, Elsevier, vol. 32(9), pages 1817-1838, November. Full references (including those not matched with items on IDEAS)
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