Arbitrage mechanism leading to currency crises: a theoretical perspective (original) (raw)
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Shadow rates and multiple equilibria in the theory of currency crises
Journal of International Economics, 2000
This note generalizes to second generation models of currency crises the arbitrage-based approach first applied by Flood and Garber to first generation models. Deriving policyswitching rules based on the 'shadow exchange rate' facilitates the comparative analysis of the literature. Using the 'shadow rate', we provide and discuss an example of a common mechanism generating multiple equilibria in both first and second generation models.
NBER WORKING PAPER SERIES THE LOGIC OF CURRENCY CRISES
Once one recognizes that governments borrow international reserves and exercise other policy options to defend fixed exchange rates during currency crises, the question arises: What factors determine a government's decision to abandon a currency peg or hang on? In a setting of purposeful action by the authorities, the possibility of self-fulfilling crises becomes important.
1994
Once one recognizes that governments borrow international reserves and exercise other policy options to defend fixed exchange rates during currency crises, the question arises: What factors determine a government's decision to abandon a currency peg or hang on? In a setting of purposeful action by the authorities, the possibility of self-fulfilling crises becomes important. Speculative anticipations depend on conjectured government
Re-examining a first generation model of currency crisesS
The Paul Krugman's Balance-of-Payments Crises model analyses a situation where a currency crisis in a fixed exchange rate regime can emerge from misconduct on the economic policy. The dynamic of international reserves dictates the ability of the policymaker to defend the exchange rate regime and the model presents a situation in which the speculative attack occurs before the international reserves exhaust. The aim of this work is to reexamining the model and solving it numerically. For that purpose some functional forms were adopted for the generic functions introduced in the original paper, as well as the attribution of values to the parameters of the model.
Currency crises with the threat of an interest rate defence
Journal of International Economics, 2011
While virtually all currency crisis models recognise that the decision to abandon a peg depends on how tenaciously policy makers defend it, this is seldom modelled explicitly. We add the threat of an interest rate defence to the global game model of Morris and Shin (American Economic Review 88, 1998). With an endogenous defence, actions of speculators may become strategic substitutes instead of the usual complements. Nevertheless, our generalised model remains tractable and has a unique threshold equilibrium. It provides additional insights. For instance, the threat of an interest rate defence makes speculation riskier and this may be sufficient to keep speculators out when fundamentals are still relatively strong.
Defending Against Speculative Attacks I A Hybrid Model of Exchange Market Pressure and Crises
Social Science Research Network, 2008
While virtually all currency crisis models recognise that the fate of a currency peg depends on how tenaciously policy makers defend it, they seldom model how this is done. We incorporate the mechanics of speculation and the interest rate defence against it in the model of Morris and Shin (American Economic Review 88, 1998). Our model captures that the interest rate defence reduces speculators' profits and thus postpones the crisis. It predicts that well before the fall of a currency interest rates are increased to offset the buildup of exchange market pressure, and this then unravels in a sharp depreciation. This pattern is at odds with predictions of standard models, but we show that it fits well with reality.
With this conference, held nineteen years after the appearance of Krugman's pathbreaking article on speculative attacks, the literature on this subject can be said to have passed through adolescence and reached maturity (in, one hopes, all senses of the word). Like any maturing subject, this one evinces changing preoccupations. The early literature on speculative attacks focused on conflicts between the stance of monetary and fiscal policies on the one hand and the authorities' exchange rate commitment on the other. An attack was assumed to occur when excessively expansionary monetary and fiscal policies gradually depleted the central bank's international reserves. It was triggered when those reserves fell to a critical threshold at which they were abruptly exhausted by currency speculators. This model was attuned to the time in the sense that inflation and, by implication, excessively expansionary monetary and fiscal policies were widespread problems, creating chronically overvalued currencies, and in that capital markets were less than fully liberalized, limiting the
Defending against speculative attacks: A hybrid model of exchange market pressure and crises
2008
While virtually all currency crisis models recognise that the fate of a currency peg depends on how tenaciously policy makers defend it, they seldom model how this is done. We incorporate themechanics of speculation and the interest rate defence against it in the model of Morris and Shin (American Economic Review 88, 1998). Our model captures that the interest rate