Working Paper: CEPR ID: DP2893
Authors: Ivan Pastine
Abstract: This Paper demonstrates that the implications of first-generation speculative attack models do nothold if there is a rational, forward-looking policy maker. The policy maker will be able to avoidpredictable speculative attacks by introducing uncertainty into the decisions of speculators. Thischanges the sudden attack into a prolonged period of increasing speculation and uncertainty. Inaddition, the model provides useful insights into the viability of temporary nominal anchor policies,and a theoretical foundation for a useful empirical methodology.
Keywords: nominal anchor; optimizing; BOP crises; speculative attacks
JEL Codes: E58; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rational policymaker (D72) | unpredictable speculative attacks (D84) |
| rational policymaker (D72) | uncertainty in speculators' decisions (D84) |
| uncertainty in speculators' decisions (D84) | prolonged period of increasing speculation (D84) |
| rational policymaker (D72) | increasing interest differentials (E43) |
| rational policymaker (D72) | forward exchange rate premia (F31) |
| increasing interest differentials (E43) | abandonment of fixed exchange rates (F33) |
| forward exchange rate premia (F31) | abandonment of fixed exchange rates (F33) |