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.