Changes in Regime and the Risks in Stabilising Speculative Markets

Andrew Hughes Hallett

Scottish Journal of Political Economy, 1993, vol. 40, issue 1, 24-42

Abstract: Latent in the notion of rational expectations is the idea of optimizing behavior in the private sector. This paper develops a way for evaluating price stabilization programs when the behavior of agents--and of speculators in particular-- is influenced by forward looking expectations of market prices. In order not to treat (the parameters of) market behavior as invariant to interventions, the stabilization authority uses a model of intertemporal price determination set within a dynamic game between the authority and the private sector. The effectiveness of stabilization strategies which allow for forward looking rather than adaptive sector expectations are then compared. Their stabilizing ability is not much affected, but successful stabilization programs become more expensive when forward looking behavior is accommodated. Schemes which ignore such private sector expectations will therefore eventually break down. Copyright 1993 by Scottish Economic Society.

Date: 1993
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Scottish Journal of Political Economy is currently edited by Tim Barmby, Andrew Hughes-Hallett and Campbell Leith

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