Currency crisis duration and interest defence
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Tullio Gregori: Dipartimento di Scienze Economiche e Statistiche, Università degli Studi di Trieste, Italy, Postal: Dipartimento di Scienze Economiche e Statistiche, Università degli Studi di Trieste, Italy
International Journal of Finance & Economics, 2009, vol. 14, issue 3, 256-267
Asymmetric wars of attrition between speculators and a Central Bank can provide a useful framework to address currency crisis length and explain why a speculative attack can fail after some time. Interest rate defence can be analysed too. A non-linear relationship between interest rates and peg defence emerges, as a rate upsurge can reduce both concession times. With some welfare loss functions, increasing the domestic rate too much is a self-defeating policy as the Central Bank will opt out before speculators concede, but the reverse holds for lower rates. Copyright © 2008 John Wiley & Sons, Ltd.
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