Currency Speculation in Fixed Exchange Rate Regimes: Theory by Anja Zenker

By Anja Zenker

Speculative foreign money crises appear to have develop into a standard and inevitable phenomenon within the foreign financial method. by contrast historical past, a number of ways were constructed by way of economists to hide the vast variety of occasions within which balance-of-payments crises happened. Anja Zenker offers a complete perception into the physique of theoretical and empirical literature approximately forex hypothesis in mounted trade fee regimes. the writer discusses diversified generations of theoretical types and their empirical relevance in contemporary foreign money crises. in addition, she considers assorted coverage innovations which try and steer clear of speculative assaults on alternate expense pegs.

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Extra resources for Currency Speculation in Fixed Exchange Rate Regimes: Theory and Empirical Evidence

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As in fixed exchange rate regimes, the government can fix the price of gold at an announced level by buying any amount of gold offered or selling its inventory at that price. In order to investigate the effects of anticipations on the price path if the government announces that it will attempt to peg the gold price at a given fixed value f, we first have to determine the initial price on the path that emerges if an announcement is actua1ly made before we ana1yze the dependence of the price against the private shock at the time of the announcement, with the same properties of the price path prevailing as in the single-auction case.

Flood/Garber, 1984, p. ) In the first case, the post-collapse flexible exchange rate is assumed to depend only on market fundsmentals, excluding deviations from the long-run equilibrium path. In other words, the arbitrary constant A which reflects agents' speculative behavior is set equa1 to 0, bringing about the definite solution to the differential equation: Set) = '::: + M~t) for t 2: z. (5) However, agents' perfect foresight of the collapse implies that predictable discrete exchange rate jumps at time z are precluded.

COUfIC, _ exee.. demand fur that currency .. bonkr transaetiOIll. In eonsequeoce of the _ demand. it will beoome the key cumm:y of1hll tystem zmdotber CIIIl1ral blinks will be fmad to follow thit country'. imerelt ntc in eWer 10 tIttlIct lUfficieat 1DlOUDt. ofkey currency reterVeI nccdod to bUzmce the FE. (Spabn, 2001, p. 147) 20 Overview of Fixed Exchange Rate Regimes France and Italy to import the credibility of the Bundesbank (KrugmanlObstfeld, 2006, p. ), it also caused certain asymme1ries in the intervention bebavior.

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