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The Role of Domestic and Foreign Investors in a Simple Model of Speculative Attacks

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  • Cees G. H. Diks
  • Dennis P Botman

Abstract

We introduce local and foreign investors in a simple model of speculative attacks. Local investors have less tolerance for overvaluation of the fixed exchange rate because they tend to incur lower costs when taking a short position and possess better information, and because of moral hazard created by discriminatory government guarantees. On the other hand, the prospect of higher taxation after a balance of payments crisis deters speculation by locals compared to foreign investors. Finally, the lower the degree of exchange rate pass-through, the more likely domestic investors are tp take the lead during capital flight.

Suggested Citation

  • Cees G. H. Diks & Dennis P Botman, 2005. "The Role of Domestic and Foreign Investors in a Simple Model of Speculative Attacks," IMF Working Papers 05/205, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:05/205
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    References listed on IDEAS

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