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Speculative Attack and the External Constraint in a Maximizing Model of the Balance of Payments

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  • Maurice Obstfeld

Abstract

This paper analyzes inevitable transitions between fixed and floating exchange-rate regimes in a balance-of-payments model where individual preferences are explicitly specified. The goal is to assessthe analogy between speculative attacks in foreign exchange markets and attacks on official price-fixing schemes in natural resource markets. In discrete time the analogy with resource markets is only partially correct, for in a deterministic model the collapse of a fixed rate may be characterized by two, successive attacks. The two-attack equilibriumis peculiar to discrete-time analysis, however. In the continuous-time limit of discrete-time models there is a single attack timed so as to rule out an anticipated discrete jump in the exchange rate.Balance-of-payments models differ from nonrenewable resource models in that foreign exchange reserves may be borrowed from abroad.The paper therefore asks whether there are limits to central-bank borrowing possibilities. In an idealized world where all private incomeis subject to lump-sum taxation, central-bank reserves can become infinitely negative with no violation of the public sector's intertemporal budget constraint. Nonetheless, a growth rate of domestic credit exceeding the world interest rate, if maintained indefinitely, leads to violation of the constraint in the paper's model.

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  • Maurice Obstfeld, 1984. "Speculative Attack and the External Constraint in a Maximizing Model of the Balance of Payments," NBER Working Papers 1437, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1437
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    1. Calvo, Guillermo A, 1977. "The Stability of Models of Money and Perfect Foresight: A Comment," Econometrica, Econometric Society, vol. 45(7), pages 1737-1739, October.
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    12. Brock, William A, 1974. "Money and Growth: The Case of Long Run Perfect Foresight," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(3), pages 750-777, October.
    13. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
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