
Book contents
- Frontmatter
- Contents
- Forewords by Kenji Kawakatsu and Helmut Schlesinger
- Acknowledgments
- 1 Introduction
- 2 Exchange rate stability in Europe: A historical perspective
- 3 The unfolding of the 1992–93 ERM crisis
- 4 Financial markets and ERM credibility
- 5 Modelling currency crises
- 6 A Center–Periphery model
- 7 Unilateral pegs and escape clauses: The role of domestic credibility
- 8 Policy coordination and currency crises
- 9 What caused the system to crumble?
- 10 Rebuilding the system: What next?
- References
- Index
5 - Modelling currency crises
Published online by Cambridge University Press: 06 July 2010
- Frontmatter
- Contents
- Forewords by Kenji Kawakatsu and Helmut Schlesinger
- Acknowledgments
- 1 Introduction
- 2 Exchange rate stability in Europe: A historical perspective
- 3 The unfolding of the 1992–93 ERM crisis
- 4 Financial markets and ERM credibility
- 5 Modelling currency crises
- 6 A Center–Periphery model
- 7 Unilateral pegs and escape clauses: The role of domestic credibility
- 8 Policy coordination and currency crises
- 9 What caused the system to crumble?
- 10 Rebuilding the system: What next?
- References
- Index
Summary
Exchange rate crises and speculative attacks
In the aftermath of the 1992–93 events, there has been a revival of academic interest in analyzing and modelling the timing and determinants of currency crises and speculative attacks on fixed exchange rate regimes. Many recent contributions offer valuable elements for an interpretation of the logic of the ERM crisis. Informed by the historical reconstruction presented in the previous chapters, we now provide a synthetic survey of the current literature. This also lays the groundwork for our own theoretical construction in Chapters 6, 7, and 8.
Exogenous and endogenous policies
There exist two approaches to modelling exchange rate crises. The first approach, pioneered by Krugman (1979), focuses on the timing and the mechanics of a speculative attack when national authorities pursue policies that are inconsistent with the indefinite defense of the exchange rate parity. The second approach looks at optimizing policymakers who are assumed to have good reasons to peg the currency – for example, because a peg is seen as a commitment technology for reducing the undesirable consequences of an inflationary bias – but not at any price. They may, therefore, find it optimal to abandon the exchange rate parity under certain circumstances. Throughout this chapter, we will label the two modelling strategies as, respectively, the “exogenous-policy” and the “endogenous-policy” approach.
In Krugman's model, domestic credit expansion persistently exceeds the growth of money demand at a fixed exchange rate.
- Type
- Chapter
- Information
- Financial Markets and European Monetary CooperationThe Lessons of the 1992–93 Exchange Rate Mechanism Crisis, pp. 83 - 92Publisher: Cambridge University PressPrint publication year: 1998