A two-country model of speculative attacks

Available from: 
October 2013
Paper author(s): 
Raul Razo-Garcia (Carleton University)
Carlos Lopez (UC Berkeley)
Macroeconomics - Economic growth - Monetary Policy

We present a two country model of speculative attacks where two countries fix their currency to the dollar and investors face noise in their signals about the relative strength of fundamentals across countries. The model predicts that in equilibrium the weakest peg is always more likely to suffer from speculative attacks. When the noise in the signals is small (information is accurate), tiny differences in the level of fundamentals across economies are sufficient to sustain currency equilibria where the strong peg remains with probability one while the weak peg collapses or may collapse.  


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Research section: 
Lacea 2013 annual meeting
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