The Role of Domestic and Foreign Investors in a Simple Model of Speculative Attacks

Abstract:     
We introduce local and foreign investors in a simple model of speculative attacks. Local investors have less tolerance for overvaluation of the fixed exchange rate because they tend to incur lower costs when taking a short position and possess better information, and because of moral hazard created by discriminatory government guarantees. On the other hand, the prospect of higher taxation after a balance of payments crisis deters speculation by locals compared to foreign investors. Finally, the lower the degree of exchange rate pass-through, the more likely domestic investors are to take the lead during capital flight.

Number of Pages in PDF File: 24

Keywords: Location of Investors, Speculative Attacks, Private Information, Government Guarantees, Taxation, Exchange Rate Pass-Through

JEL Classification: F32, F34, D84

working papers series