Balance-of-payments crises in a perfect foresight optimizing model |
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| Authors: | Stijn Claessens |
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| Affiliation: | 1. Department of Pediatrics and Adolescence, Oulu University Hospital, Oulu, Finland;2. Clinical Nursing Science, Department of Pediatrics and Adolescence, Oulu University Hospital, Oulu, Finland;3. Institute of Health Sciences, University of Oulu, 90014 University of Oulu, Oulu, Finland;1. Research Hub, Bank of England, Threadneedle Street, London EC2R 8AH, United Kingdom;2. Department of Economics and Finance, City University of Hong Kong, Tat Chee Avenue, Kowloon, Hong Kong |
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| Abstract: | The paper extends the literature on balance-of-payments crises by treating the issue in a generalized equilibrium framework. Investors maximize a non-separble utility function, defined over consumption and real money balances, under the threat of a future collapse of the fixed exchange rate regime. The paper obtains real effects in the form of current account adjustments when agents realize that the fixed regime is not indefinitely viable. New information regarding official foreign lending can cause attacks at the central bank in the form of sudden shifts by investors out of domestic money into foreign bonds. |
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