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'.