Non-Credible Intervention Commitments in a Fixed Exchange Rate System and the 1992-1993 EMS Crisis

Pompeo Della Posta ()
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Pompeo Della Posta: Università degli Studi di Pisa, Dipartimento di Scienze Economiche, Postal: Via Ridolfi 10, 56124 Pisa (PI), Italy., http://www-dse.ec.unipi.it/

Economia Internazionale / International Economics, 2002, vol. 55, issue 4, 479-499

Abstract: Focusing on the 1992-93 crisis of the European Monetary System (Ems), I stress, in opposition with the conclusions reached by “escape clause” models, the role played by the availability of foreign reserves. In particular, I show the lack of credibility of the Bundesbank’s commitment to intervene in the foreign exchange market in defence of the Ems currencies subject to a speculative attack: the intervention commitment would have been fully credible only if the Bundesbank accepted to import the inflation rate of the partner countries. Moreover, although I prove that the Bundesbank’s optimal degree of intervention would have been higher if it could be sterilised, i.e. if it could be accompanied by a credit reduction, I argue that such a reduction would have caused an ambiguous effect on the timing of the speculative attack. Finally, this model shows that even when the fundamentals do not diverge when a country participates to a fixed exchange rate, the mere expectation of a divergent behaviour when exchange rates float freely may precipitate a currency crisis in a self-fulfilling way.

Keywords: Speculative attacks; currency crisis; self-fulfilling speculative attacks; European Monetary System. (search for similar items in EconPapers)
JEL-codes: E58 F31 F32 F33 (search for similar items in EconPapers)
Date: 2002
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