The Choice of Exchange Rate Regime and Speculative Attacks

Alex Cukierman (), Itay Goldstein and Yossi Spiegel

No 3714, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We develop a framework for studying the choice of exchange rate regime in an open economy where the local currency is vulnerable to speculative attacks. The framework makes it possible to study, for the first time, the strategic interaction between the ex ante choice of regime and the probability of ex post currency attacks. The optimal regime is determined by a policymaker who trades off the loss from nominal exchange rate uncertainty against the cost of maintaining a given regime. This cost is affected in turn by the likelihood of a speculative attack. Searching for the optimal regime within the class of exchange rate bands, we show that the optimal regime is either a peg (a zero-width band), a free float (an infinite-width band), or a non-degenerate finite-width band. Our framework generates several novel predictions and shows that when the endogeneity of the exchange rate regime is recognized explicitly, conventional wisdom may be reversed. For instance, the imposition of a Tobin tax, by inducing policymakers to set less flexible regimes, may raise the likelihood of speculative attacks.

Keywords: choice of exchange rate regime; currency crises; global games; reputation; speculators; tobin tax (search for similar items in EconPapers)
JEL-codes: F30 F40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn
Date: Written
View list of references View citations in EconPapers

Downloads: (external link)
http://www.cepr.org/pubs/dps/DP3714.asp (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: The Choice of Exchange-Rate Regime and Speculative Attacks (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:cpr:ceprdp:3714

Ordering information: This working paper can be ordered from
http://www.cepr.org/pubs/dps/DP3714.asp

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers
Address: Centre for Economic Policy Research, 53--56 Great Sutton Street, London EC1V 0DG
Series data maintained by ().