Currency crises with the threat of an interest rate defence |
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Authors: | Tijmen R Daniëls Henk Jager Franc Klaassen |
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Institution: | aDe Nederlandsche Bank N.V., Financial Stability Division, PO Box 98, 1000 AB Amsterdam, The Netherlands;bUniversiteit van Amsterdam, Faculty of Economics and Business, Roetersstraat 11, 1018 WB Amsterdam, The Netherlands;cTechnische Universität Berlin, Institut für Volkswirtschaftslehre und Wirtschaftsrecht, Berlin, Germany;dTinbergen Institute, Amsterdam, The Netherlands |
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Abstract: | 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. |
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Keywords: | JEL classification: E58 F31 F33 G15 |
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