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Rational and Self-Fulfilling Balance-of-Payments Crises

  • Maurice Obstfeld

The recent balance-of-payments literature shows that-speculative attacks on a pegged exchange rate must sometimes-occur if the path of the rate is riot to offer abnormal profit opportunities. Such attacks are fully rational, as they reflect the market's response to a regime breakdown that is inevitable.This paper shows that, given certain expectations about policy, balance-of-payments crises can also be purely self-fulfilling events. In such cases even a permanently viable regime maybreak down, and the economy will possess multiple equilibria corresponding to different subjective assessments of the probability of collapse. The behavior of domestic interest rates and foreign reserves will naturally reflect the possibility of a speculative attack. Work on foreign-exchange crises derives from the natural-resource literature initiated by Salant and Henderson (1978),where the definition of "abnormal" profit opportunities is straightforward. Because the definition is not always straight-forward in a monetary context, this paper also shows how crises occur in a discrete-time stochastic monetary model when an eventual breakdown is inevitable.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1486.

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Date of creation: Nov 1984
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Publication status: published as Obstfeld, Maurice. "Rational and Self-Fulfilling Balance-of-Payments Crises ." American Economic Review, Vol. 76, No. 1, (March 1986), pp. 72-81.
Handle: RePEc:nbr:nberwo:1486
Note: ITI IFM
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  1. Salant, Stephen W & Henderson, Dale W, 1978. "Market Anticipations of Government Policies and the Price of Gold," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 627-48, August.
  2. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  3. Maurice Obstfeld, 1986. "Speculative Attack and the External Constraint in a Maximizing Model of the Balance of Payments," Canadian Journal of Economics, Canadian Economics Association, vol. 19(1), pages 1-22, February.
  4. Salant, Stephen W, 1983. "The Vulnerability of Price Stabilization Schemes to Speculative Attack," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 1-38, February.
  5. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  6. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
  7. Maurice Obstfeld & Kenneth Rogoff, 1981. "Speculative hyperinflations in a maximizing models: can we rule them out?," International Finance Discussion Papers 195, Board of Governors of the Federal Reserve System (U.S.).
  8. Lizondo, Jose Saul, 1983. "Foreign exchange futures prices under fixed exchange rates," Journal of International Economics, Elsevier, vol. 14(1-2), pages 69-84, February.
  9. Blanchard, Olivier Jean, 1979. "Speculative bubbles, crashes and rational expectations," Economics Letters, Elsevier, vol. 3(4), pages 387-389.
  10. Robert P. Flood & Peter M. Garber, 1981. "Gold monetization and gold discipline," International Finance Discussion Papers 190, Board of Governors of the Federal Reserve System (U.S.).
  11. Pedro Aspe Armella & Rudiger Dornbusch & Maurice Obstfeld, 1983. "Financial Policies and the World Capital Market: The Problem of Latin American Countries," NBER Books, National Bureau of Economic Research, Inc, number arme83-1, December.
  12. Wyplosz, Charles, 1986. "Capital controls and balance of payments crises," Journal of International Money and Finance, Elsevier, vol. 5(2), pages 167-179, June.
  13. Obstfeld, Maurice, 1984. "Balance-of-Payments Crises and Devaluation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(2), pages 208-17, May.
  14. 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.
  15. Stephen W. Salant & Dale W. Henderson, 1976. "Market anticipations, government policy, and the price of gold," International Finance Discussion Papers 81, Board of Governors of the Federal Reserve System (U.S.).
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