The viability of a fixed exchange rate system is shown to be state- or shock-dependent. We show, simply, Obstfeld's claim that there may be multiple equilibria - multiple shock values for which a regime switch becomes optimal. We distinguish between self-fulfilling and history-dependent crises....

High interest rates to defend the exchange rate signal that a government is committed to fixed exchange rates, but may also signal weak fundamentals. We test the effectiveness of the interest rate defense by disaggregating into the effects on future interest rates differentials, expectations of...

Do large investors increase the vulnerability of a country to speculative attacks in the foreign exchange markets? To address this issue, we build a model of currency crises where a single large investor and a continuum of small investors independently decide whether to attack a currency based...

Currency crisis literature offers a broad area of research regarding the causes and impacts of the phenomenon. The literature recently focuses on the appropriate policy measures in the aftermath of a currency crisis; however the studies do not gather around a robust answer regarding the...

The first generation models of currency crises have often been criticized because they predict that, in the absence of very large triggering shocks, currency attacks should be predictable and lead to small devaluations. This paper shows that these features of first generation models are not...

We ask when currency carry trades are associated with destabilizing dynamics in the foreign exchange market, and investigate the role of monetary policy rules in setting of such dynamics. In a model where the exchange rate has a long-term fundamental anchor, we find that carry trades can be...

This Paper looks at the effect of domestic and external financial liberalization. Using a sample of 27 developing and developed countries, it studies the exchange market pressure and output gap effects of liberalization. The results show that developing and developed countries differ in many...

If currency crises are triggered when the currency overvaluation hits a threshold, the expected magnitude of a devaluation, conditional on its occurrence, is substantially different from the unconditional expected currency overvaluation. That is not true if currency crises are triggered by...

This paper investigates the theoretical properties of a class of 'second generation' models of currency crises as well as their applicability to empirical work. We show that under some conditions these models give rise to an arbitrarily large number of equilibria, as well as cyclic or chaotic...

This paper examines the effect of monetary policy on the exchange rate during currency crises. Using data for a number of crisis episodes between 1986 and 2004, we find strong evidence that raising the interest rate: (i) has larger adverse balance sheet effects and is therefore less effective in...