NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Rational and Self-Fulfilling Balance-of-Payments Crises

Maurice Obstfeld

NBER Working Paper No. 1486 (Also Reprint No. r0722)
Issued in November 1984
NBER Program(s):   ITI   IFM

The recent balance-of-payments literature shows that-speculative attacks on a pegged exchange rate must sometimes-occur if the path of the rate is riot to offer abnormal profit opportunities. Such attacks are fully rational, as they reflect the market's response to a regime breakdown that is inevitable.This paper shows that, given certain expectations about policy, balance-of-payments crises can also be purely self-fulfilling events. In such cases even a permanently viable regime maybreak down, and the economy will possess multiple equilibria corresponding to different subjective assessments of the probability of collapse. The behavior of domestic interest rates and foreign reserves will naturally reflect the possibility of a speculative attack. Work on foreign-exchange crises derives from the natural-resource literature initiated by Salant and Henderson (1978),where the definition of "abnormal" profit opportunities is straightforward. Because the definition is not always straight-forward in a monetary context, this paper also shows how crises occur in a discrete-time stochastic monetary model when an eventual breakdown is inevitable.

download in pdf format
   (310 K)

download in djvu format
   (178 K)

email paper

This paper is available as PDF (310 K) or DjVu (178 K) (Download viewer) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w1486

Published: Obstfeld, Maurice. "Rational and Self-Fulfilling Balance-of-Payments Crises ." American Economic Review, Vol. 76, No. 1, (March 1986), pp. 72-81. citation courtesy of

Users who downloaded this paper also downloaded these:
Calvo Balance-of-Payments Crises in Emerging Markets: Large Capital Inflows and Sovereign Governments
Obstfeld w5285 Models of Currency Crises with Self-Fulfilling Features
Agenor, Bhandari, and Flood w3919 Speculative Attacks and Models of Balance-of-Payments Crises
Obstfeld w4640 The Logic of Currency Crises
Krugman Are Currency Crises Self-Fulfilling?
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us