Speculative Attacks: Fundamentals and Self-Fulfilling Prophecies

Robert Flood () and Nancy Marion ()

No 5789, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a modified understand better the 1994 Mexican peso crisis as well as aspects of the European currency crises in 1992-93. We introduce the assumption that the speculative attack is sterilized by the domestic monetary authority, we incorporate a stochastic risk premium, and we allow for some price stickiness. The modified model shows that macroeconomic policies inconsistent in the longer run with a fixed exchange rate can push the economy inevitably towards a currency crisis, but it also demonstrates how a government currently following consistent macroeconomic policies can suddenly face a speculative attack triggered by a large shift in speculative opinion. However, the ability of a sudden shift in speculative opinion to trigger an attack is bounded by the position of fundamentals. Thus an attack does not require a later change in policies to make it profitable.

JEL-codes: E42 F31 (search for similar items in EconPapers)
Date: 1996-10
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (43)

Downloads: (external link)
http://www.nber.org/papers/w5789.pdf (application/pdf)

Related works:
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: https://EconPapers.repec.org/RePEc:nbr:nberwo:5789

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w5789

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().