Speculative Attacks on Fixed Exchange Rates: An Empirical Exploration with Special Reference to the Russian Economy Essay Example
Speculative attacks on fixed exchange rate regimes
Introduction
In my essay I will focus on the problem of speculative attacks on the countries with fixed exchange rate regimes. By definition a speculative attack on a fixed exchange rate is the attempt of currency market participants to force Central Bank to abandon the support of fixed exchange rate regime, thus getting profit from the jump in exchange rate of foreign currency. Obviously, appreciation of domestic currency as the result from speculative attack can not be achieved (Central Bank will only increase its reserves), that's why any speculative attack is aimed at depreciation of domestic currency. For the attack to be successful speculators must create substantial short term demand for foreign currency, which can not be satisfied by Central Bank at current fixed exchange rate because of the lack of foreign reserves. Speculative attacks are a very widespread phenomenon: they were in tens of countries in the world, including Russia on October 11, 1994. In a short term these attacks harm the economy: the stock market goes down, domestic currency depreciates, inflation pressure grows. But on the other hand, we may look at this process as on inevitable clearing the world from weak and inappropriate monetary and currency policies. In this work I will cover the conditions, which are to be satisfied for the attack to be successful, will briefly talk about various models for speculative attacks (first and second generation, etc.), will discuss the strategies of the players in this game. I will also refer to and investigate Russia's experience in 1998. And I will finish with a discussion on possible Central Bank's policies to avoid speculative attacks. Theoretical Coverage First Generation Models
The easiest understanding of first speculative attacks was reflected in the so-called models of first generation. The description can be found in works of Krugman , Flood and Garber , Blanco and Garber and
Introduction
In my essay I will focus on the problem of speculative attacks on the countries with fixed exchange rate regimes. By definition a speculative attack on a fixed exchange rate is the attempt of currency market participants to force Central Bank to abandon the support of fixed exchange rate regime, thus getting profit from the jump in exchange rate of foreign currency. Obviously, appreciation of domestic currency as the result from speculative attack can not be achieved (Central Bank will only increase its reserves), that's why any speculative attack is aimed at depreciation of domestic currency. For the attack to be successful speculators must create substantial short term demand for foreign currency, which can not be satisfied by Central Bank at current fixed exchange rate because of the lack of foreign reserves. Speculative attacks are a very widespread phenomenon: they were in tens of countries in the world, including Russia on October 11, 1994. In a short term these attacks harm the economy: the stock market goes down, domestic currency depreciates, inflation pressure grows. But on the other hand, we may look at this process as on inevitable clearing the world from weak and inappropriate monetary and currency policies. In this work I will cover the conditions, which are to be satisfied for the attack to be successful, will briefly talk about various models for speculative attacks (first and second generation, etc.), will discuss the strategies of the players in this game. I will also refer to and investigate Russia's experience in 1998. And I will finish with a discussion on possible Central Bank's policies to avoid speculative attacks. Theoretical Coverage First Generation Models
The easiest understanding of first speculative attacks was reflected in the so-called models of first generation. The description can be found in works of Krugman , Flood and Garber , Blanco and Garber and