Buy custom Essay Speculative attacks on fixed exchange rates

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The attack can be successful only if foreign currency would appear undervalued and the shift to floating regime would lead to its appreciation.

? to illustrate a well known empirical fact that speculative attack very often takes place even before the central bank runs out of reserves.

So the key place in the model is occupied by the dynamics of foreign reserves...

If the exchange rate is fixed and internal credit is constantly growing under PPP and UIP it means that foreign reserves should decrease. As the internal credit grows agents will use excess money, issued by CB, to by foreign assets and, consequently, it will result in foreign reserves depletion. When CB's position in foreign reserves go down, it loses its power in defending the fixed exchange rate regime...

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