Working Paper: CEPR ID: DP1055
Authors: Stefan Gerlach; Frank Smets
Abstract: During the European exchange market turmoil in 1992-3 it was evident that speculative attacks tended to spread across currencies. Using a two-country version of the model developed by Flood and Garber (1984) we show how a speculative attack against one currency may accelerate the `warranted' collapse of a second parity. More important, even if the parity of the second currency is viable in the absence of a collapse of the first one, it might be subjected to a speculative attack if the reserves available to defend the parity are `small'.
Keywords: speculative attacks; exchange rate contagion
JEL Codes: F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| collapse of one currency (F31) | collapse of another currency (F31) |
| collapse of one currency (F31) | real appreciation of another currency (F31) |
| real appreciation of another currency (F31) | depress income and prices in the second country (F16) |
| depress income and prices in the second country (F16) | reduce money demand and foreign reserves (E41) |
| reduce money demand and foreign reserves (E41) | accelerate collapse of the second parity (C69) |
| collapse of one currency (F31) | unwarranted speculative attacks on another currency (F31) |