External shocks, balance sheet contagion, and speculative attack on the pegged exchange rate system
Document Type
Journal article
Source Publication
Review of Development Economics
Publication Date
2-1-2009
Volume
13
Issue
1
First Page
87
Last Page
98
Abstract
A simple monetary model is built to illustrate that the pegged exchange rate system will collapse under an unstable external environment via the balance sheet contagion and the "boiling frog" effect, even if the domestic policy and the fundamentals are sound. If agents anticipate this happening, a speculative attack may still occur. This result is different from that of the first-generation currency crisis model, where the inconsistent domestic policy brings in the collapse of the peg. The policy options to defend the peg in the author's model depend on the nature of the shock. Effective capital control can only be implemented for capital outflow shock. Capital account deregulation is more stabilizing under a current account deficit shock, however. This paper also distinguishes the effect of capital mobility with that of the asset substitutability, as they have completely different impacts on the peg.
DOI
10.1111/j.1467-9361.2008.00464.x
Print ISSN
13636669
E-ISSN
14679361
Publisher Statement
Copyright © 2008 Blackwell Publishing Ltd
Access to external full text or publisher's version may require subscription.
Full-text Version
Publisher’s Version
Language
English
Recommended Citation
Ma, Y. (2009). External shocks, balance sheet contagion, and speculative attack on the pegged exchange rate system. Review of Development Economics, 13(1), 87-98. doi: 10.1111/j.1467-9361.2008.00464.x