NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Collapsing Exchange Rate Regimes: Another Linear Example

Robert P. Flood, Peter M. Garber, Charles Kramer

NBER Working Paper No. 5318
Issued in October 1995
NBER Program(s):   IFM

In the literature on speculative attacks on a fixed exchange rate, it is usually assumed that the monetary authority responsible for fixing the exchange rate reacts passively to the monetary disruption caused by the attack. This assumption is grossly at odds with actual experience where monetary-base implications of the attacks are usually sterilized. Such sterilization renders the standard monetary-approach attack model unable to provide intellectual guidance to recent attack episodes. In this paper we describe the problems with the standard model and develop a version of the portfolio-balance exchange rate model that allows the study of episodes with sterilization. Sterilized attacks may be regarded as a laboratory test of the monetary versus portfolio-balance exchange rate models. The monetary model fails the test. These issues are motivated by reference to the December 1994 collapse of the Mexican peso.

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Document Object Identifier (DOI): 10.3386/w5318

Published: Flood, Robert P. & Garber, Peter M. & Kramer, Charles, 1996. "Collapsing exchange rate regimes: Another linear example," Journal of International Economics, Elsevier, vol. 41(3-4), pages 223-234, November.

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