DP1315 Models of Currency Crises with Self-fulfilling Features

Author(s): Maurice Obstfeld
Publication Date: January 1996
Keyword(s): Balance-of-payments Crisis, Fixed Exchange Rate, Multiple Equilibria, Speculative Attack
JEL(s): E58, F33
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1315

The discomfort a government suffers from speculation against its currency determines the strategic incentives of speculators and the scope for multiple currency-market equilibria. After describing an illustrative model in which high unemployment may cause an exchange rate crisis with self-fulfilling features, the paper reviews some other self-reinforcing mechanisms. Recent econometric evidence seems to support the practical importance of these mechanisms.