Currency crises with the threat of an interest rate defence
While virtually all currency crisis models recognise that the decision to abandon a peg depends on how tenaciously policy makers defend it, this is seldom modelled explicitly. We add the threat of an interest rate defence to the global game model of Morris and Shin (American Economic Review 88, 1998). With an endogenous defence, actions of speculators may become strategic substitutes instead of the usual complements. Nevertheless, our generalised model remains tractable and has a unique threshold equilibrium. It provides additional insights. For instance, the threat of an interest rate defence makes speculation riskier and this may be sufficient to keep speculators out when fundamentals are still relatively strong.
Year of publication: |
2011
|
---|---|
Authors: | Daniëls, Tijmen R. ; Jager, Henk ; Klaassen, Franc |
Published in: |
Journal of International Economics. - Elsevier, ISSN 0022-1996. - Vol. 85.2011, 1, p. 14-24
|
Publisher: |
Elsevier |
Keywords: | Currency crisis Interest rate defence Global game Strategic substitutes |
Saved in:
Online Resource
Saved in favorites
Similar items by person
-
Defending against speculative attacks
Daniëls, Tijmen R., (2009)
-
Currency crises with the threat of an interest rate defence
Daniëls, Tijmen R., (2011)
-
Defending against Speculative Attacks
Daniëls, Tijmen R., (2008)
- More ...