TY  - JOUR
AU  - Buiter,Willem H.
TI  - Borrowing to Defend the Exchange Rate and the Timing and Magnitude of Speculative Attacks
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 1844
PY  - 1988
Y2  - 1988
UR  - http://www.nber.org/papers/w1844
L1  - http://www.nber.org/papers/w1844.pdf
N1  - Author contact info:
Willem H. Buiter
Citigroup Centre
Canada Square, Canary Wharf
London E14 5LB
UNITED KINGDOM
E-Mail: willembuiter@btinternet.com
AB  - 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.
ER  -