DP1055 Contagious Speculative Attacks
Author(s): | Stefan Gerlach, Frank Smets |
Publication Date: | November 1994 |
Keyword(s): | Exchange Rate Contagion, Speculative Attacks |
JEL(s): | F31, F41 |
Programme Areas: | International Macroeconomics |
Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=1055 |
During the European exchange market turmoil in 1992-3 it was evident that speculative attacks tended to spread across currencies. Using a two-country version of the model developed by Flood and Garber (1984) we show how a speculative attack against one currency may accelerate the `warranted' collapse of a second parity. More important, even if the parity of the second currency is viable in the absence of a collapse of the first one, it might be subjected to a speculative attack if the reserves available to defend the parity are `small'.