Speculative attacks on fixed exchange rate regimes pdf

Speculation and the decision to abandon a fixed exchange rate regime abstract this paper investigates the extent to which it is possible for speculative attacks to be predictable given information on economic fundamentals. This recent crisis has greatly revived the debate on speculative attacks, balanceofpayments crisis and the longrun substainability of fixed exchangerate regimes with free capital mobility. This recent crisis has greatly revived the debate on speculative attacks, balanceofpayments crisis and the longrun substainability of fixed exchange rate regimes with free capital mobility. The possibility that arbitrary speculative behavior can cause the collapse of a fixed exchangerate regime bears on a traditional argument favoring fixed exchange rates. Alex cukierman, itay goldstein, and yossi spiegel july 22, 2004 abstract we develop a framework that makes it possible to study, for the.

Types of exchange rate systems financial management. The paradox occurs if when a country runs out of gold its currency appreciates or, equivalently, if a speculative attack happens only after the country would have run out of reserves in the absence of a speculative attack. The empirical findings indicate clear support for fixed regimes particularly in emerging and developing countries. Speculative bubbles, speculative attacks, and policy. A regime switching approach to studying speculative. Speculative attacks on fixed or fixed but adjustable exchange rate regimes seem to have become a standard feature of the landscape of foreign exchange markets. Anja zenker provides a comprehensive insight into the body of theoretical and empirical literature about currency speculation in. Do government guarantees really matter in fixed exchange. Speculation and the decision to abandon a fixed exchange rate. Testing the signaling effect in different exchange rate regimes.

We gratefully acknowledge grants from the national science foundation through the n. Theories the seminal idea was the work of salant and henderson on attacks on gold pegs. Collapses of fixed exchangerate regimes as breakdown in. Kenyon college, gambier, oh, 43022 this paper examines the issue of speculative attacks on the exchange rate in an economy in which.

Pdf anomalous speculative attacks on fixed exchange rate. Figure 191 shows that a temporary fall in a countrys export demand reduces that countrys output more under a fixed rate than a floating rate. The purpose of this article is to empirically investigate which exchange rate arrangements are associated with more speculative attacks in the foreign exchange market, a relationship which is estimated using a least squares dummy variables panel data model. Interest rate, speculative attacks and target zones. Also, this article addresses the issue of measurement errors in the classification of exchange rate regimes by using four. Fixed exchange rate regimes, hedging, government guarantees, debt denomination.

This paper analyzes krugmans contention that there is a gold standard paradox in the speculative attack literature. The new literature on exchange rate regime choice emphasizes considerations relating to. A standard model of predictable attacks is extended to incorporate an optimizing monetary authority. Krugman, 1991 and on speculative attacks against fixed exchange rate regimes e. Speculation and the decision to abandon a fixed exchange. This paper was previously circulated under the title on the fundamentals of self ful. A fixed exchange rate regime pegs the value of the domestic currency to another currency. This belief that fixed rates lead to stability is only partly true, since speculative attacks tend to target currencies with fixed exchange rate regimes, and in fact, the stability of the economic system is maintained mainly through capital control. An exchange rate regime is the way a monetary authority of a country or currency union manages the currency in relation to other currencies and the foreign exchange market. Krugman, 1979 flood and garber, 1984, leads to the conclusion that the interest rate differential is a decreasing function of the fundamentals, even when the stock of reserves.

Can raising interest rates deter speculative attacks. In particular, many authors interpreted all the major events that charac. Economic models of speculative attacks and the drachma. Speculative attacks and the dynamics of exchange rates stephen j. Given the nature of fixed exchange rate systems, this paper implements a regimeswitching model with timevarying transition probabilities to, simultaneously, identify speculative attacks and study the determinants of switching to speculative regimes. Fixed versus floating exchange rates and the role of. Nordic speculative attacks in chronological order, 19711992 56 appendix b. Choice of exchangerate regime and speculative attacks. Anomalous speculative attacks on fixed exchange rate. The possibility of overvaluation of the domestic currency is quite high. Nordic and german exchangerate regimes, 19711992 58.

Initial contributions stressed the role of deteriorating economic fundamentals prior. Exchange rate regime choice national library of serbia. A regime switching approach to studying speculative attacks. Real rates appear to be lower under fixed exchange rate regimes than under. The papers in this book are grouped into three sections. A speculative attack often leads to a sharp exchange rate depreciation despite a strong policy response to defend the currency value.

Speculative attacks on nordic exchangerates, 19711992. At the outset, i should explain what motivates my interest in this topic. A government can prevent or delay a devaluation by drawing down its stock of foreign reserves or raising domestic interest rates to attract capital inflows. The choice of exchangerate regime and speculative attacks alex cukierman. Exchange rate regimes for emerging markets november 2000 54 various people to advance their own theories on the way the world works and the way it should work. A speculative attack often leads to a sharp exchange rate. Anja zenker provides a comprehensive insight into the body of theoretical and empirical literature about currency speculation in fixed exchange rate regimes. The choice of exchangerate regime and speculative attacks.

Gold standard therefore vulnerable to speculative attacks credibility of commitment to gold standard important countries would suspend convertability during major wars nakamurasteinsson columbia exchange rate regimes 3 68. Is the effect of interest rate signaling the same for all monetary authorities. Suppose the rupee is on a fixed exchange rate of rs. Since the mid 1990s, theories of speculative attacks have argued that fixed exchange rate regimes induce excessive borrowing in foreign currency as an optimal response to implicit guarantees that the government will not devalue the domestic currency. Speculative attacks and the dynamics of exchange rates article pdf available in annals of economics and finance 32. Anomalous speculative attacks on fixed exchange rate regimes.

The above results show the overall effects of tight monetary policy on speculators attack decision, but we are ultimately interested in testing the conditional effects in different exchange rate regimes. The possibility that arbitrary speculative behavior can cause the collapse of a fixed exchange rate regime bears on a traditional argument favoring fixed exchange rates. The choice of exchangerate regime and speculative attacks 1207 models, the policies that ultimately lead to the collapse of xed exchange rate regimes are speci ed exogenously, whereas in secondgeneration models, policymakers play an active role in deciding whether or not to defend the currency against a speculative attack. Speculative attacks and the dynamics of exchange rates. This paper analyzed krugmans contention that there is a gold standard paradox in the speculative attack literature. Exchange rate regimes, speculative attacks, currency crises.

The recent asian crisis wave of speculative attacks seems similar, yet the behavior of the economies and economic policy prior to the attacks and after them was different. Fixed exchange rate regimes in mediterranean countries and the. Speculative attack with sudden loss of confidence in the. The rigidly fixed exchange rate arrangements, specifically monetary union, currency board, and dollarization, with either eliminated or reduced possibility of devaluation, are therefore favoured. Peria estimates an univariate msar model on the exchange rate and given that the speculative attacks do not always result in exchange rate devaluations but can be avoided by the governments by selling reserves or by raising interest rates, she also considers a msvar of changes in exchange rates, reserves and interest rates. Economic models of speculative attacks and the drachma crisis. Are pegged and intermediate exchange rate regimes more. Against this background, various approaches have been developed by economists to cover the broad range of situations in which balanceofpayments crises occurred. The operation and collapse of fixed exchangerate regimes. Fixed versus floating exchange rates and the role of central bank interventions lectures 910. Less vulnerable to speculative attacks monetary policy effective no need to raise interest rates or cause. If membership of a fixed exchange rate is shortlived in defeats the purpose and rather than gradual changes in the exchange rate, there is added uncertainty and speculation about the exchange rate. This model, which constitutes an extension of the literatures on target zones e.

It is closely related to monetary policy and the two are generally dependent on many of the same factors, such as economic scale and openness, inflation rate, elasticity of the labor market, financial market development. The choice of exchange rate regime and speculative attacks 1207 models, the policies that ultimately lead to the collapse of xed exchange rate regimes are speci ed exogenously, whereas in secondgeneration models, policymakers play an active role in deciding whether or not to defend the currency against a speculative attack. The objective of this paper is to study such a three stage exchange rate. The choice of exchangerate regime and speculative attacks 1207 models, the policies that ultimately lead to the collapse of xed exchangerate regimes are speci ed exogenously, whereas in secondgeneration models, policymakers play an active role in deciding whether or not to defend the currency against a speculative attack. The supposed excesses of seemingly untethered financial markets have been documented for some time, but only recently have the concerted attacks by speculators on exchangerate regimes begun to occupy the popular imagination. Robert flood and peter garber confess to a fixation on understanding extreme events such as speculative bubbles, currency.

Currency speculation in fixed exchange rate regimes. Exchange rate regimes for emerging markets speech by mr stephen grenville, deputy governor of the reserve bank of australia, to the economic society of australia, inc. Fixed exchange rate regimes in mediterranean countries and. Nordic and german exchange rate regimes, 19711992 58. Fixed exchange rate regimes can be subject to large adjustments currency crisis. Since the mid 1990s, theories of speculative attacks have argued that fixed exchange rate regimes induce excessive borrowing in foreign currency as an. Exchange rate regimes for emerging markets address by dr sa grenville, deputy governor. A speculative attack often leads to a sharp exchange rate depreciation despite a strong policy response to. Using data on brazilian firms before and after the end of the fixed exchange rate. In a successful attack the currency depreciates, while an unsuccessful attack may leave the exchange rate unchanged, but at the cost of spent foreign exchange reserves or a higher domestic interest rate. Foreign currency debt and fixed exchange rate regimes. Pdf speculative attacks and the dynamics of exchange rates. Vulnerable to speculative attacks monetary policy ineffective.

Fixed versus floating exchange rates and the role of central bank interventions motivation. The fixed exchange rate is more susceptible to currency crises, in other words, to speculative attacks. Fixed versus floating exchange rates and the role of central. As with many debates, the coalitions which form to advocate a particular outcome often have diverse motives, and not everyone comes from the same starting point or uses the same. A crawling peg is a hybrid between a fixed and flexible exchange rate regime. The argument is that since a flexible exchange rate may be subject to arbitrary speculative fluctuations, the exchange rate should be fixed in order to protect the real sectors. Do government guarantees really matter in fixed exchange rate. The problems with a fixed exchange rate are described below.