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