Speculative Attack and the External Constraint in a Maximizing Model of the Balance of Payments
Year: 1984
Type: report
Abstract: This paper analyzes inevitable transitions between fixed and floating exchange-rate regimes in a balance-of-payments model where individual preferences are explicitly specified.The goal is to assess the analogy between speculative attacks in foreign exchange markets and attacks on official price-fixing schemes in natural resource markets.In discrete time the analogy with resource markets is only partially correct, for in a deterministic model the collapse of a fixed rate may be characterized by two, successive attacks.The two-attack equilibrium is peculiar to discrete-time analysis, however.In the continuous-time limit of discrete-time models there is a single attack timed so as to rule out an anticipated discrete jump in the exchange rate.Balance-of-payments models differ from nonrenewable resource models in that foreign exchange reserves may be borrowed from abroad.The paper therefore asks whether there are limits to central-bank borrowing possibilities.In an idealized world where all private income is subject to lump-sum taxation, central-bank reserves can become infinitely negative with no violation of the public sector's intertemporal budget constraint.Nonetheless, a growth rate of domestic credit exceeding the world interest rate, if maintained indefinitely, leads to violation of the constraint in the paper's model.
DOI: 10.3386/w1437
Author: Maurice Obstfeld
Institution: Columbia University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2889974605