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Speculative Attacks and the Information Role of the Interest Rate

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  • Nikola A. Tarashev

Abstract

This paper models currency attacks as carried out by speculators who condition their actions on private signals about the state and on the market-clearing interest rate. Besides affecting speculators' payoffs, this interest rate also provides an endogenous public signal. For a plausible type of investment strategies, the dual role of the interest rate allows the model to explain abrupt and intense speculative attacks solely via economic fundamentals, without resorting to sunspot variables. This result underlies a novel policy implication: An official intervention in the foreign exchange market may reinforce a currency peg by influencing the precision of public information. (JEL: D82, D84, F31) (c) 2007 by the European Economic Association.

Suggested Citation

  • Nikola A. Tarashev, 2007. "Speculative Attacks and the Information Role of the Interest Rate," Journal of the European Economic Association, MIT Press, vol. 5(1), pages 1-36, March.
  • Handle: RePEc:tpr:jeurec:v:5:y:2007:i:1:p:1-36
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    Citations

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    Cited by:

    1. 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.
    2. Tomasz Michalski & Gilles Stoltz, 2013. "Do Countries Falsify Economic Data Strategically? Some Evidence That They Might," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 591-616, May.
    3. Xavier Vives, 2014. "Strategic Complementarity, Fragility, and Regulation," Review of Financial Studies, Society for Financial Studies, vol. 27(12), pages 3547-3592.
    4. repec:eee:macchp:v2-1065 is not listed on IDEAS
    5. Szkup, Michal, 2017. "Multiplier effect and comparative statics in global games of regime change," MPRA Paper 82729, University Library of Munich, Germany.
    6. Prati, Alessandro & Sbracia, Massimo, 2010. "Uncertainty and currency crises: Evidence from survey data," Journal of Monetary Economics, Elsevier, vol. 57(6), pages 668-681, September.
    7. Anna Zabai, 2014. "Managing Default Risk," BIS Working Papers 467, Bank for International Settlements.
    8. Giese, Julia & Nelson, Benjamin & Tanaka, Misa & Tarashev, Nikola, 2013. "Financial Stability Paper No 21: How could macroprudential policy affect financial system resilience and credit? Lessons from the literature," Bank of England Financial Stability Papers 21, Bank of England.
    9. Campos, Rodolfo G., 2013. "Risk-sharing and crises. Global games of regime change with endogenous wealth," Journal of Economic Theory, Elsevier, vol. 148(4), pages 1624-1658.
    10. repec:spr:joecth:v:65:y:2018:i:1:d:10.1007_s00199-016-1014-z is not listed on IDEAS
    11. Nikola A Tarashev, 2008. "Speculative attacks, Private Signals and Intertemporal Trade-offs," BIS Working Papers 254, Bank for International Settlements.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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