Currency Crises: Introduction of Spot Speculators

The present paper studies a fixed exchange rate regime subjected to a speculative attack by spot speculators. In light of recent developments in the ERM it has become apparent that the original concept of speculative attack by Krugman (1979) does not suffice because it only allows for one time shift in portfolio and therefore excludes spot speculators who wish to sell back their holdings of foreign currency on a later date, thus restoring their original position in domestic currency. Unlike previous literature, my model indicates that the collapse of a fixed exchange rate can be accompanied with a discrete depreciation of the domestic currency, a phenomenon commonly observed in real currency crises, but absent from the previous models. Copyright @ 1999 by John Wiley & Sons, Ltd. All rights reserved.