Reverse speculative attacks: A comment

Alberto Martin

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: Introduction: Imagine the case of a Central Bank that wants to peg its currency to the Euro at some predetermined exchange rate. Imagine moreover that, at this exchange rate, there is an excess demand of domestic currency by foreigners. Conventional wisdom suggests that there is no problem whatsoever for the Central Bank to achieve its objective: all it needs to do is to expand the supply of domestic currency to accommodate whatever demand there is at the chosen exchange rate. In the process of doing so, the Central Bank will expand both its assets, i.e., foreign reserves, and its liabilities, i.e., domestic currency. Since the Central Bank can issue as much domestic currency as it desires, there is in principle no limit to the size of this policy intervention. In this interesting paper, Amador, Bianchi, Bocola and Perri (henceforth ABBP) propose a model that illustrates the limits to this conventional wisdom.

Date: 2016-04
New Economics Papers: this item is included in nep-mac and nep-mon
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