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Banking Performance and Speculative Attacks Under Asymmetric Information

  • Nabi, Mahmoud Sami

The Asian financial crisis of 1997 evolved through many stages. Although there is a consensus among economists on its "ingredients", a disagreement still exists about the exact mechanisms. This paper proposes a model explaining the triggering event of the crisis as represented by the abandon of Thailand and Korea of their fixed exchange rate. The model suggests that an external negative shock to the price of tradable goods can be the detonator of a currency crisis if some ingredients already exist. In this context, I show that the efficiency of the banking system and the speculators-government interaction play crucial roles. Under certain conditions, an efficient banking system enables the economy to resist to even high magnitudes of the shock, while an inefficient one leads to a currency crisis. In this model, abandoning the fixed parity implies a cost to the government and characterizes its type. Speculators infer the government's type when deciding to attack the currency. The paper has the following innovation: it shows that a slight variation in speculators' inference precision causes a sudden change in their sentiment, a speculative attack and the abandon of the parity.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24515.

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Date of creation: Mar 2001
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Handle: RePEc:pra:mprapa:24515
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  1. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1999. "Hedging and Financial Fragility in Fixed Exchange Rate Regimes," NBER Working Papers 7143, National Bureau of Economic Research, Inc.
  2. Flood, Robert P & Jeanne, Olivier, 2000. "An Interest Rate Defence of a Fixed Exchange Rate?," CEPR Discussion Papers 2507, C.E.P.R. Discussion Papers.
  3. Morris, Stephen & Shin, Hyun Song, 1997. "Unique Equilibrium in a Model of Self-fulfilling Currency Attacks," CEPR Discussion Papers 1687, C.E.P.R. Discussion Papers.
  4. Roberto Chang & Andres Velasco, 1998. "Financial Fragility and the Exchange Rate Regime," NBER Working Papers 6469, National Bureau of Economic Research, Inc.
  5. Philippe Bacchetta & Eric van Wincoop, 1998. "Capital flows to Emerging Markets: Liberalization, Overshooting, and Volatility," Working Papers 98.01, Swiss National Bank, Study Center Gerzensee.
  6. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
  7. Craig Burnside & Martin Eichenbaum & Sergio T. Rebelo, 2000. "On the Fundamentals of Self-Fulfilling Speculative Attacks," NBER Working Papers 7554, National Bureau of Economic Research, Inc.
  8. Frederic S. Mishkin, 1999. "International Capital Movements, Financial Volatility and Financial Instability," NBER Working Papers 6390, National Bureau of Economic Research, Inc.
  9. Flood, Robert & Marion, Nancy, 1999. "Perspectives on the Recent Currency Crisis Literature," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(1), pages 1-26, January.
  10. Stephan Haggard, 2000. "Political Economy of the Asian Financial Crisis, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 107, December.
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