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Was the French Franc Crisis a Sunspot Equilibrium?

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  • Olivier Jeanne and Paul Masson.

Abstract

This paper examines the extent to which speculation against the French franc in 1992-93 was motivated by the fundamentals or resulted from a sunspot phenomenon. We develop a model of currency crises which encompasses both hypotheses about the origin of speculation. The estimation shows that the model with sunspots not only better tracks the episodes of speculation, but also gives a better account of the relationship between the fundamentals and the devaluation expectations.

Suggested Citation

  • Olivier Jeanne and Paul Masson., 1997. "Was the French Franc Crisis a Sunspot Equilibrium?," Center for International and Development Economics Research (CIDER) Working Papers C97-095, University of California at Berkeley.
  • Handle: RePEc:ucb:calbcd:c97-095
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    References listed on IDEAS

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    1. Manning, Alan, 1992. "Multiple equilibria in the British labour market : Some empirical evidence," European Economic Review, Elsevier, vol. 36(7), pages 1333-1365, October.
    2. Ozkan, F Gulcin & Sutherland, Alan, 1995. "Policy Measures to Avoid a Currency Crisis," Economic Journal, Royal Economic Society, vol. 105(429), pages 510-519, March.
    3. Bensaid, Bernard & Jeanne, Olivier, 1997. "The instability of fixed exchange rate systems when raising the nominal interest rate is costly," European Economic Review, Elsevier, vol. 41(8), pages 1461-1478, August.
    4. Frenkel, Jacob A, 1981. "Flexible Exchange Rates, Prices, and the Role of "News": Lessons from the 1970s," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 665-705, August.
    5. Flood, Robert P & Garber, Peter M, 1984. "Gold Monetization and Gold Discipline," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 90-107, February.
    6. Farmer Roger E. A. & Guo Jang-Ting, 1994. "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory, Elsevier, vol. 63(1), pages 42-72, June.
    7. Woodford, Michael, 1987. "Three Questions about Sunspot Equilibria as an Explanation of Economic Fluctuations," American Economic Review, American Economic Association, vol. 77(2), pages 93-98, May.
    8. Velasco, Andres, 1996. "Fixed exchange rates: Credibility, flexibility and multiplicity," European Economic Review, Elsevier, vol. 40(3-5), pages 1023-1035, April.
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    Cited by:

    1. Weber, Axel A., 1997. "Sources of Currency Crisis: An Empirical Analysis," Discussion Paper Serie B 418, University of Bonn, Germany.
    2. Árvai, Zsófia & Vincze, János, 1998. "Valuták sebezhetősége pénzügyi válságok a kilencvenes években
      [Vulnerability of currencies financial crises in the nineties]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(6), pages 509-533.
    3. Barry Eichengreen & Olivier Jeanne, 2000. "Currency Crisis and Unemployment: Sterling in 1931," NBER Chapters,in: Currency Crises, pages 7-43 National Bureau of Economic Research, Inc.
    4. Axel A. Weber, 1998. "Sources of Currency Crises: An Empirical Analysis," Working Papers 25, Oesterreichische Nationalbank (Austrian Central Bank).
    5. Craine, Roger, 2001. "Dollarization: An Irreversible Decision," Department of Economics, Working Paper Series qt404915zn, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    6. Jesper Rangvid, 1997. "Deviations from long-run equilibria and probabilities of devaluations: An empirical analysis of Danish realignments," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 133(3), pages 497-522, September.
    7. Roger Craine, 2001. "Dollarization: An Irreversible Decision," International Finance 0103003, EconWPA.
    8. Roger Craine, 1999. "Exchange Rate Regime Credibility, the Agency Cost of Capital and Devaluation," International Finance 9902002, EconWPA.

    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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