The Role of Domestic and Foreign Investors in a Simple Model of Speculative Attacks
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Summary:
We introduce local and foreign investors in a simple model of speculative attacks. Local investors have less tolerance for overvaluation of the fixed exchange rate because they tend to incur lower costs when taking a short position and possess better information, and because of moral hazard created by discriminatory government guarantees. On the other hand, the prospect of higher taxation after a balance of payments crisis deters speculation by locals compared to foreign investors. Finally, the lower the degree of exchange rate pass-through, the more likely domestic investors are tp take the lead during capital flight.
Series:
Working Paper No. 2005/205
Subject:
Conventional peg Currencies Exchange rate arrangements Exchange rates Government liabilities
English
Publication Date:
October 1, 2005
ISBN/ISSN:
9781451862249/1018-5941
Stock No:
WPIEA2005205
Pages:
24
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