The `Gold Standard Paradox' and Its Resolution
This paper analyses Krugman's contention that there is a `gold standard paradox' in the speculative attack literature. The paradox occurs if a country's currency appreciates after it runs out of gold or equivalently if a speculative attack can happen only after the country `naturally' runs out of reserves. We first show that Krugman's paradox is a very general phenomenon, which does not require mean-reverting processes for the fundamentals, and which can be present in discrete-time as well as in continuous-time models. We present several specific cases in which the paradox occurs, i.e., environments which do not support an equilibrium. Next we show that, contrary to Krugman's conjecture, it is not necessary to abandon the assumption of a perfectly fixed exchange rate in favour of a band system in order to recover a well-defined equilibrium. We propose two alternative ways of amending the model which produce an equilibrium and preserve the fixed exchange rate assumption.
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- Willem H. Buiter, 1986.
"Borrowing to Defend the Exchange Rate and the Timing and Magnitude of Speculative Attacks,"
NBER Working Papers
1844, National Bureau of Economic Research, Inc.
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- Buiter, Willem H., 1986. "Borrowing to Defend the Exchange Rate and the Timing and Magnitude of Speculative Attacks," CEPR Discussion Papers 95, C.E.P.R. Discussion Papers.
- John Kareken & Neil Wallace, 1981. "On the Indeterminacy of Equilibrium Exchange Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 96(2), pages 207-222.
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"Stochastic Process Switching: Some Simple Solutions,"
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2998, National Bureau of Economic Research, Inc.
- Froot, Kenneth A & Obstfeld, Maurice, 1991. "Stochastic Process Switching: Some Simple Solutions," Econometrica, Econometric Society, vol. 59(1), pages 241-250, January.
- 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.
- Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-325, August.
- Robert P. Flood & Peter M. Garber, 1989. "The Linkage Between Speculative Attack and Target Zone Models of Exchange Rates," NBER Working Papers 2918, National Bureau of Economic Research, Inc.
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