A stochastic model of self-fulfilling crises in fixed exchange rate systems
✍ Scribed by Tobias Adrian; Daniel Gros
- Publisher
- John Wiley and Sons
- Year
- 1999
- Tongue
- English
- Weight
- 236 KB
- Volume
- 4
- Category
- Article
- ISSN
- 1076-9307
No coin nor oath required. For personal study only.
✦ Synopsis
been thoroughly investigated in the recent literature on speculative attacks. We find that an increase in uncertainty makes self-fulfilling speculative attacks less likely. Depending on the benefits of keeping exchange rates fixed, there are two possibilities: for low benefits, an increase in uncertainty makes an exchange rate peg unsustainable and leads to an immediate attack. If the benefits of keeping exchange rates fix are high, however, more uncertainty eliminates the possibility of self-fulfilling exchange rate attacks. For high benefits, only an extremely strong negative demand shock can lead to a devaluation, which, however, is not self-fulfilling.