Reverse speculative attacks

Manuel Amador, Javier Bianchi, Luigi Bocola and Fabrizio Perri

Journal of Economic Dynamics and Control, 2016, vol. 72, issue C, 125-137

Abstract: In January 2015, in the face of sustained capital inflows, the Swiss National Bank abandoned the floor for the Swiss Franc against the Euro, a decision which led to the appreciation of the Swiss Franc. The objective of this paper is to present a simple numerical framework that helps to better understand the timing of this episode, which we label a “reverse speculative attack”. We model a central bank which wishes to maintain a peg, and responds to increases in demand for domestic currency by expanding its balance sheet. In contrast to the classic speculative attacks, which are triggered by the depletion of foreign assets, reverse attacks are triggered by the concern of future balance sheet losses. Our key result is that the interaction between the desire to maintain the peg and the concern about future losses, can lead the central bank to first accumulate a large amount of reserves, and then to abandon the peg, just as we have observed in the Swiss case.

Keywords: Fixed exchange rates; Currency crises; Balance sheet concerns (search for similar items in EconPapers)
JEL-codes: F31 F32 (search for similar items in EconPapers)
Date: 2016
References: Add references at CitEc
Citations: View citations in EconPapers (18)

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Working Paper: Reverse Speculative Attacks (2016)
Working Paper: Reverse Speculative Attacks (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:72:y:2016:i:c:p:125-137

DOI: 10.1016/j.jedc.2016.04.005

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