The Role of Domestic and Foreign Investors in a Simple Model of Speculative Attacks
Dennis P. J. Botman
International Monetary Fund (IMF) - Fiscal Affairs Department
Cees G. H. Diks
University of Amsterdam - Faculty of Economics and Business (FEB); Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)
IMF Working Paper No. 05/205
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, D84working papers series
Date posted: March 3, 2006
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