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A Model of the ERM Crisis


  • Ozkan, F Gulcin
  • Sutherland, Alan


Existing models of exchange rate crises do not provide a good explanation for the breakdown of the ERM in 1992 3. This paper presents an alternative model which captures some of the important features of that period. The switch from a fixed to a floating rate is triggered by an optimizing government that wants to loosen monetary policy and boost aggregate demand. Agents in the foreign exchange market know the government's objective function and therefore build expectations of a regime switch into interest differentials. It is shown that this interaction between private sector expectations and government preferences can imply a breakdown of the fixed rate sooner than the government would like.

Suggested Citation

  • Ozkan, F Gulcin & Sutherland, Alan, 1994. "A Model of the ERM Crisis," CEPR Discussion Papers 879, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:879

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    References listed on IDEAS

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    Cited by:

    1. Barry Eichengreen., 1994. "History and Reform of the International Monetary System," Center for International and Development Economics Research (CIDER) Working Papers C94-041, University of California at Berkeley.
    2. Kruger, Mark & Osakwe, Patrick N. & Page, Jennifer, 1998. "Fundamentals, Contagion and Currency Crises: An Empirical Analysis," Staff Working Papers 98-10, Bank of Canada.
    3. Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1994. "Speculative Attacks on Pegged Exchange Rates: An Empirical Exploration with Special Reference to the European Monetary System," CEPR Discussion Papers 1060, C.E.P.R. Discussion Papers.
    4. Weber, Axel A., 1997. "Sources of Currency Crisis: An Empirical Analysis," Discussion Paper Serie B 418, University of Bonn, Germany.
    5. Barry Eichengreen & Andrew K. Rose & Charles Wyplosz, 1996. "Is There a Safe Passage to EMU? Evidence on Capital Controls and a Proposal," NBER Chapters,in: The Microstructure of Foreign Exchange Markets, pages 303-332 National Bureau of Economic Research, Inc.
    6. 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.
    7. Békés, Gábor, 1998. "Optimális valutaövezetek, gazdasági integráltság és hasonlatosság: az Európai Unió példája
      [Optimum currency areas, economic similarity and integration. The European case]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 709-737.
    8. Bernard Bensaïd & Olivier Jeanne, 1996. "Fragilité des systèmes de change fixe et contrôle des capitaux," Économie et Prévision, Programme National Persée, vol. 123(2), pages 163-174.
    9. Michael Bordo & Anna Schwartz, 1996. "Why clashes between internal and external stability goals end in currency crises, 1797–1994," Open Economies Review, Springer, vol. 7(1), pages 437-468, March.
    10. Loisel, Olivier & Martin, Philippe, 2001. "Coordination, cooperation, contagion and currency crises," Journal of International Economics, Elsevier, vol. 53(2), pages 399-419, April.
    11. Patrick Artus & Claude Jessua, 1996. "La spéculation," Revue Économique, Programme National Persée, vol. 47(3), pages 409-424.
    12. Buiter, Willem H., 1995. "Macroeconomic policy during a transition to monetary union," LSE Research Online Documents on Economics 20701, London School of Economics and Political Science, LSE Library.
    13. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
    14. Axel A. Weber, 1998. "Sources of Currency Crises: An Empirical Analysis," Working Papers 25, Oesterreichische Nationalbank (Austrian Central Bank).
    15. Barry Eichengreen, 2000. "The EMS Crisis in Retrospect," NBER Working Papers 8035, National Bureau of Economic Research, Inc.
    16. Pastine, Ivan, 2002. "Speculation and the decision to abandon a fixed exchange rate regime," Journal of International Economics, Elsevier, vol. 57(1), pages 197-229, June.
    17. Eichengreen, Barry, 2003. "Three generations of crises, three generations of crisis models," Journal of International Money and Finance, Elsevier, vol. 22(7), pages 1089-1094, December.
    18. Peter Kenen, 1996. "Analyzing and managing exchange-rate crises," Open Economies Review, Springer, vol. 7(1), pages 469-492, March.
    19. Heinemann, Friedrich, 1998. "EMU and fiscal discipline: the end of the depreciation threat," ZEW Discussion Papers 98-30, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    20. Eichengreen, Barry & Wyplosz, Charles, 1995. "What Do Currency Crises Tell Us About the Future of the International Monetary System?," Center for International and Development Economics Research (CIDER) Working Papers 233418, University of California-Berkeley, Department of Economics.
    21. Bensaid, Bernard & Jeanne, Olivier, 1997. "The instability of fixed exchange rate systems when raising the nominal interest rate is costly," European Economic Review, Elsevier, vol. 41(8), pages 1461-1478, August.
    22. Juan Garcia, 1999. "The Collapse of the ‘New EMS’: An Interpretation," Open Economies Review, Springer, vol. 10(2), pages 203-219, May.
    23. Olivier Jeanne, 1996. "Les modèles de crise de change : un essai de synthèse en relation avec la crise du franc de 1992-1993," Économie et Prévision, Programme National Persée, vol. 123(2), pages 147-162.
    24. Jeanne, Olivier, 1997. "Are currency crises self-fulfilling?: A test," Journal of International Economics, Elsevier, vol. 43(3-4), pages 263-286, November.
    25. Torben Andersen, 1998. "Shocks and the Viability of a Fixed Exchange Rate Commitment," Open Economies Review, Springer, vol. 9(2), pages 139-156, April.

    More about this item


    Balance of Payments Crises; EMS; ERM; Speculative Attacks;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements


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