Exchange Rates
Speculative attacks

In Discussion Paper No. 1060, Research Fellows Barry Eichengreen, Andrew Rose and Charles Wyplosz present an empirical analysis of speculative attacks on pegged exchange rates in 22 countries between 1967-92. They define speculative attacks or crises as large movements in exchange rates, interest rates, and international reserves. They develop stylized facts concerning the univariate behaviour of a variety of macroeconomic variables, comparing crises with periods of tranquility.

The authors' findings are different for the exchange rate mechanism (ERM) and non-ERM sub-samples. For the non-ERM sub-sample, they find significant differences in the behaviour of budget deficits, inflation rates, rates of credit growth, and trade balances when comparing periods preceding speculative attacks and control group observations. For the ERM sub-sample, in contrast, there is a striking lack of differences. The behaviour of reserves (and possibly also interest rates) differs between periods of crisis and tranquility; but this is not surprising since these are two of the variables on the basis of which episodes are categorized as speculative crises. The only other variables whose behaviour differs significantly between crises and non-crises in the ERM sub-sample are money growth and inflation.

A final finding is that the behaviour of macroeconomic variables differs significantly around the time of speculative attacks on the one hand and realignments and changes in exchange rate regimes on the other. ERM countries undergoing realignments have significantly higher inflation rates, interest rates, rates of money and credit growth and budget deficits, and their trade balances are significantly weaker. None of these statements is true for the events associated with realignments of non-ERM currencies or with the collapse of the Bretton Woods, Smithsonian, or Narrow Margin regimes of pegged exchange rates.

Speculative Attacks on Pegged Exchange Rates: An Empirical Exploration with Special Reference to the European Monetary System
Barry Eichengreen, Andrew K Rose and Charles Wyplosz

Discussion Paper No. 1060, November 1994 (IM)