DP2893 Speculation and the Decision to Abandon a Fixed Exchange Rate Regime

Author(s): Ivan Pastine
Publication Date: July 2001
Keyword(s): nominal anchor, optimizing BOP crises, speculative attacks
JEL(s): E58, F31
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2893

This Paper demonstrates that the implications of first-generation speculative attack models do not hold if there is a rational, forward-looking policy maker. The policy maker will be able to avoid predictable speculative attacks by introducing uncertainty into the decisions of speculators. This changes the sudden attack into a prolonged period of increasing speculation and uncertainty. In addition, the model provides useful insights into the viability of temporary nominal anchor policies, and a theoretical foundation for a useful empirical methodology.