Devaluation expectations and speculative attacks on the currency

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Title: Devaluation expectations and speculative attacks on the currency
Author: Willman, Alpo
Organization: Bank of Finland
Suomen Pankki
Department / Unit: Bank of Finland Research Department
Series: Bank of Finland Research Discussion Papers
Suomen Pankin keskustelualoitteita
Series number: 8/1988
Year of publication: 1988
Publication date: 17.6.1988
Pages: 36
Subject (yso): valuuttakurssit; devalvaatio; odotukset; korko; hyökkäys
Abstract: In this paper balance-of-payments crises are studied in a framework in which investors do not know the threshol~ level of foreign reserves, the attainment of which implies that the central bank abandons its fixed exchange target. Investors are alternatively risk neutral or risk averters. It is shown that, depending on whether the threshold level is stochastic or fixed but unknown to investors, currency speculation reveals itself as, respectively, a speculative outflow distributed over a longer time period or a sudden speculative attack on the currency.

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