Agénor, P., J. Bhandari and R. Flood, 1992, “Speculative Attacks and Models of Balance of Payments Crises,” IMF Staff Papers 39(2), pp. 357-394.
Andersen, T., 1994, “Shocks and the Viability of a Fixed Exchange Rate Commitment,” Discussion Paper No. 969, Centre for Economic Policy Research.
Bensaid, B., and O. Jeanne, 1997, “The Instability of Fixed Exchange Rate Systems When Raising the Nominal Interest Rate is Costly,” European Economic Review 41, pp. 1461-1478.
Buiter, W., 1986, “Borrowing to Defend the Exchange Rate and the Timing and Magnitude of Speculative Attacks,” Working Paper 1844, National Bureau of Economic Research.
Calvo, G. and E. Mendoza, 1996, “Mexico’s Balance-of-Payments Crisis: A Chronicle of a Death Foretold,” Journal of International Economics 41, pp. 235-264.
Davies, G. and D. Vines, 1995, “Equilibrium Currency Crises: Are Multiple Equilibria Self-fulfilling or History Dependent?,” Discussion Paper 1239, Centre for Economic Policy Research.
Eichengreen, B., A. Rose and C. Wyplosz, 1994, “Speculative Attacks on Pegged Exchange Rates: An Empirical Exploration With Special Reference to the European Monetary System,” Working Paper 4898, National Bureau of Economic Research.
Flood, R. and P. Garber, 1984, “Collapsing Exchange-Rate Regimes: Some Linear Examples,” Journal of International Economics 17, pp. 1-13.
Goldberg, L., 1989, “Heterogeneous Agents and the Collapse of an Exchange Rate Regime,” Economic Research Reports, New York University.
Obstfeld, M., 1986, “Speculative Attack and the External Constraint in a Maximizing Model of the Balance of Payments,” Canadian Journal of Economics 1, pp. 1-22.
Otani, K., 1989, “A Collapse of Fixed Rate Regime with a Discrete Realignment of the Exchange Rate,” Journal of The Japanese and International Economies 3, pp. 250-269.
Sachs, J., A. Tornell and A. Velasco, 1996, “The Mexican Peso Crisis: Sudden Death or Death Foretold?,” Journal of International Economics 41, pp. 265-283.
I would like to thank Ben Bernanke, Peter Kenen, and Kenneth Rogoff for their comments. Comments by seminar participants at Princeton University are also appreciated. Financial support from the Alfred P. Sloan Foundation and the Bank of Thailand is gratefully acknowledged. All remaining errors are mine.
The large literature inspired by this model is extensively surveyed by Agenor, Bhandari, and Flood (1992).
For example, the central banks of both the United Kingdom and Italy were entitled under ERM rules to credit lines from Germany and thus they were able to engage in direct foreign exchange intervention on a very large scale. More recently, a multilateral currency swap arrangement was set up among the East Asian countries under which countries can draw on the resources of other central banks to fend off an attack.
For example, a typical money market equilibrium can be characterized by (for simplicity, ignore the transaction role of money)
The appendix outlines an alternative way of obtaining the attack schedule (2) through the introduction of risk-averse speculators.
The debt ceiling can be allowed to depend negatively on the intensity of attack, πe, so that it is determined endogenously without affecting the main results of the paper.
Note that the model is general enough to accommodate the case where the threshold for borrowing is non-zero. It is also possible to take into account the opportunity cost of running down reserves without altering any of the results.
A possible specification for k is
The upper bound on the intensity of attack can also be justified by assuming that agents need to hold a minimum amount of domestic currency for transaction purposes so that Md(id=∞) > 0, and the money demand schedule becomes vertical past a certain level of interest rate. More obviously, the expected rate of depreciation cannot exceed 100 percent. Finally, the appendix also illustrates how speculators’ resource constraints can be related to
Note that allowing for the possibility of being rationed in the international capital market implies the parametric restriction