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The Role of Domestic and Foreign Investors in a Simple Model of Speculative Attacks
Author:
Cees G. H. Diks null

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and
Mr. Dennis P Botman
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Series:
IMF Working Papers
Volume/Issue:
Volume 2005: Issue 205
Language:
English
Publication Date:
01 Oct 2005
DOI:
https://doi.org/10.5089/9781451862249.001
ISBN:
9781451862249
ISSN:
1018-5941
Pages:
24
Keywords:
WP; exchange rate; short position
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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We introduce local and foreign investors in a simple model of speculative attacks. Local investors have less tolerance for overvaluation of the fixed exchange rate because they tend to incur lower costs when taking a short position and possess better information, and because of moral hazard created by discriminatory government guarantees. On the other hand, the prospect of higher taxation after a balance of payments crisis deters speculation by locals compared to foreign investors. Finally, the lower the degree of exchange rate pass-through, the more likely domestic investors are tp take the lead during capital flight.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund