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Speculative Attacks, Forward Market Intervention and the Classic Bear Squeeze

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  • Subir Lall

Abstract

A typical strategy used by speculators to launch an attack on a fixed exchange regime is the use of forward markets. Central banks also intervene in forward markets to counter speculation. This paper addresses the question of how an attack is launched on the forward market, and what the optimal policy response to such speculation is in the forward and spot markets. The paper also demonstrates how central banks can impose a bear squeeze on speculators. Recent events in South East Asian currency markets are interpreted within the framework of the model’s predictions.

Suggested Citation

  • Subir Lall, 1997. "Speculative Attacks, Forward Market Intervention and the Classic Bear Squeeze," IMF Working Papers 97/164, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:97/164
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    Cited by:

    1. Dodd, Randall, 2002. "Derivatives, the Shape of International Capital Flows and the Virtues of Prudential Regulation," WIDER Working Paper Series 093, World Institute for Development Economic Research (UNU-WIDER).
    2. Young-Han Kim, 2003. "International policy coordination for financial market stability in the Asian economies," Applied Economics, Taylor & Francis Journals, vol. 35(10), pages 1123-1132.
    3. 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.
    4. Herman Kamil, 2008. "Is Central Bank Intervention Effective Under Inflation Targeting Regimes? The Case of Colombia," IMF Working Papers 08/88, International Monetary Fund.
    5. Woosik Moon & Yeongseop Rhee, 2006. "Spot and foward market intervention during the 1997 Korean currency crisis," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 59(238), pages 243-268.
    6. Bacha, Obiyathulla I., 1997. "The Asian Currency Crisis - A Fait Accompli?," MPRA Paper 12756, University Library of Munich, Germany.
    7. Pichit Phatrawimolporn & Teeraphol Rattanalungkarn, 2001. "Open Market Operation & Effectiveness of Monetary Policy," Working Papers 2001-01, Monetary Policy Group, Bank of Thailand.
    8. Kraay, Aart, 2003. "Do high interest rates defend currencies during speculative attacks?," Journal of International Economics, Elsevier, vol. 59(2), pages 297-321, March.
    9. Woosik Moon & Yeongseop Rhee, 2006. "Spot and foward market intervention during the 1997 Korean currency crisis," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 59(238), pages 243-268.
    10. Sujit Chakravorti & Subir Lall, 2000. "The double play: simultaneous speculative attacks on currency and equity markets," Working Paper Series WP-00-17, Federal Reserve Bank of Chicago.
    11. Jorge I Canales Kriljenko & Cem Karacadag & Roberto Pereira Guimarães, 2003. "Official Intervention in the Foreign Exchange Market; Elements of Best Practice," IMF Working Papers 03/152, International Monetary Fund.

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