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The Choice of Exchange-Rate Regime and Speculative Attacks

Author

Listed:
  • Alex Cukierman

    (Tel Aviv University and Tilburg University,)

  • Itay Goldstein

    (Wharton School, University of Pennsylvania,)

  • Yossi Spiegel

    (Tel Aviv University,)

Abstract

We develop a framework that makes it possible to study, for the first time, the strategic interac-tion between the ex ante choice of exchange-rate regime and the likelihood of ex post currency attacks. The optimal regime is determined by a policymaker who trades off the loss from nom-inal exchange-rate uncertainty against the cost of adopting a given regime. This cost increases, in turn, with the fraction of speculators who attack the local currency. Searching for the optimal regime within the class of exchange-rate bands, we show that the optimal regime can be either a peg (a zero-width band), a free float (an infinite-width band), or a nondegenerate band of finite width. We study the effect of several factors on the optimal regime and on the probability of currency attacks. In particular, we show that a Tobin tax induces policymakers to set less flexible regimes. In our model, this generates an increase in the probability of currency attacks. (JEL: F31, D84) Copyright (c) 2004 by the European Economic Association.

Suggested Citation

  • Alex Cukierman & Itay Goldstein & Yossi Spiegel, 2004. "The Choice of Exchange-Rate Regime and Speculative Attacks," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1206-1241, December.
    • Handle: RePEc:tpr:jeurec:v:2:y:2004:i:6:p:1206-1241
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    Cited by:

    1. A. Bénassy-Quéré & B. Cœuré, 2002. "The Survival of Intermediate Exchange rate Regimes," Thema Working Papers 2002-11, THEMA (Théorie Economique, Modélisation et Applications), CY Cergy-Paris University, ESSEC and CNRS.
    2. Basteck, Christian & Daniëls, Tijmen R. & Heinemann, Frank, 2013. "Characterising equilibrium selection in global games with strategic complementarities," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2620-2637.
    3. Richard K. Lyons & Ganesh Viswanath-Natraj, 2020. "What Keeps Stablecoins Stable?," NBER Working Papers 27136, National Bureau of Economic Research, Inc.
    4. Dzsamila Vonnak, 2018. "Multidimensional global games and some applications," CERS-IE WORKING PAPERS 1803, Institute of Economics, Centre for Economic and Regional Studies.
    5. Leila Ali, 2012. "Flexibility: Stability's Best Friend in Non-transparent Countries?," International Economic Journal, Taylor & Francis Journals, vol. 26(2), pages 247-264, December.
    6. Iljoong Kim & Inbae Kim, 2005. "Endogenous changes in the exchange rate regime: A bureaucratic incentive model," Public Choice, Springer, vol. 125(3), pages 339-361, December.
    7. Daniëls, Tijmen R. & Jager, Henk & Klaassen, Franc, 2011. "Currency crises with the threat of an interest rate defence," Journal of International Economics, Elsevier, vol. 85(1), pages 14-24, September.

    More about this item

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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