Working Paper: NBER ID: w22298
Authors: Manuel Amador; Javier Bianchi; Luigi Bocola; Fabrizio Perri
Abstract: In January 2015, in the face of sustained capital inflows, the Swiss National Bank abandoned the floor for the Swiss Franc against the Euro, a decision which led to the appreciation of the Swiss Franc. The objective of this paper is to present a simple framework that helps to better understand the timing of this episode, which we label a "reverse speculative attack". We model a central bank which wishes to maintain a peg, and responds to increases in demand for domestic currency by expanding its balance sheet. In contrast to the classic speculative attacks, which are triggered by the depletion of foreign assets, reverse attacks are triggered by the concern of future balance sheet losses. Our key result is that the interaction between the desire to maintain the peg and the concern about future losses can lead the central bank to first accumulate a large amount of reserves, and then to abandon the peg, just as we have observed in the Swiss case.
Keywords: No keywords provided
JEL Codes: F31; F32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in money demand (E41) | Accumulation of reserves (E22) |
| Decrease in international interest rates (E43) | Accumulation of reserves (E22) |
| Accumulation of reserves (E22) | Abandonment of the peg (F31) |
| Abandonment of the peg (F31) | Appreciation of the currency (F31) |
| Increase in money demand (E41) | Abandonment of the peg (F31) |
| Decrease in international interest rates (E43) | Abandonment of the peg (F31) |
| Increase in money demand (E41) | Appreciation of the currency (F31) |
| Decrease in international interest rates (E43) | Appreciation of the currency (F31) |