NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Borrowing to Defend the Exchange Rate and the Timing and Magnitude of Speculative Attacks

Willem H. Buiter

NBER Working Paper No. 1844 (Also Reprint No. r0979)
Issued in February 1986
NBER Program(s):   ITI   IFM

The paper extends the recent literature on collapsing managed exchange rate regimes by allowing explicitly for the qovernment budget constraint and the interest cost of servicing the public debt. The policy experivent that is analysed is the decision by a government to replenish its stock of foreign exchange reserve through a once-off open market sale of bonds. Without a fundanental fiscal correction (i.e. a decision to reduce the primary (non-interest) deficit by an amount equal to the increase in the interest cost of servicing the debt) the conseqinces are as follows. In a deterministic model the timing of the speculative attack is brought forward (delayed) if the borrowing takes place long before (close to) the date at which without borrowing the collapse would have occurred. The magnitude of the attack (the final loss of reserves) always increases because of borrowing. In a stochastic model, borrowing reduces the probability of an early collapse and increases the likelihood of a later collapse. Under mild conditions, the expected length of the time interval until the collapse occus is increased by borrowing.

download in pdf format
   (748 K)

download in djvu format
   (458 K)

email paper

This paper is available as PDF (748 K) or DjVu (458 K) (Download viewer) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w1844

Published: Buiter, Willem H. "Borrowing to Defend the Exchange Rate and the Timing and Magnitude of Speculative Attacks," Journal of International Economics, Vol . 23, No. 1/2, August 1987. citation courtesy of

 
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