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Self-Fulfilling Risk Predictions: An Application to Speculative Attacks

Author

Listed:
  • Mr. Robert P Flood
  • Ms. Nancy P. Marion

Abstract

The paper shows that changing market beliefs about currency risk can generate a self-fulfilling speculative attack on a fixed exchange rate. The attack does not require a later change in policies to make it profitable. This is illustrated by introducing an endogenous risk premium into a “first-generation model” of a speculative attack. The model is further modified to take account of sterilization, debt-financed fiscal deficits, and anticipatory price-setting behavior. The model is used to interpret the 1994 Mexican peso crisis.

Suggested Citation

  • Mr. Robert P Flood & Ms. Nancy P. Marion, 1998. "Self-Fulfilling Risk Predictions: An Application to Speculative Attacks," IMF Working Papers 1998/124, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1998/124
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    Citations

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    Cited by:

    1. Daniel, Betty C, 2001. "A Fiscal Theory of Currency Crises," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 969-988, November.
    2. Pasricha, Gurnain Kaur, 2006. "Survey of Literature on Covered and Uncovered Interest Parities," MPRA Paper 22737, University Library of Munich, Germany.
    3. Ms. Nada Choueiri, 1999. "A Model of Contagious Currency Crises with Application to Argentina," IMF Working Papers 1999/029, International Monetary Fund.
    4. Leonidas E. De la Rosa, 1999. "Ataques Especulativos:Un Enfoque De Incertidumbre E Información," Borradores de Economia 2033, Banco de la Republica.

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