The Business Cycles of Currency Speculation: A Revision of the Mundellian Framework

43 Pages Posted: 28 Sep 1998

See all articles by Enrique G. Mendoza

Enrique G. Mendoza

National Bureau of Economic Research (NBER); University of Pennsylvania

Martín Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: August 1998

Abstract

In his seminal 1960 study on the dynamics of alternative exchange rate regimes, Robert Mundell proposed a theory of balance-of-payments crises in which speculators base their actions on the observed holdings of central bank foreign reserves. We examine the quantitative implications of this view from the perspective of an equilibrium business cycle model in which rational expectations of a devaluation are conditioned on foreign reserves. The model explains some of the empirical regularities of the business cycle associated with temporary fixed-exchange-rate regimes. In turn, these cyclical dynamics validate the agents' expectations by producing devaluation probabilities that resemble those estimated from the data. The model thus aims to explain both the real effects and the collapse of exchange-rate-based stabilizations in an unified framework.

JEL Classification: F41

Suggested Citation

Mendoza, Enrique G. and Uribe, Martin, The Business Cycles of Currency Speculation: A Revision of the Mundellian Framework (August 1998). FRB International Finance Discussion Paper No. 617, Available at SSRN: https://ssrn.com/abstract=117554 or http://dx.doi.org/10.2139/ssrn.117554

Enrique G. Mendoza (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Pennsylvania ( email )

Philadelphia, PA 19104
United States

HOME PAGE: http://www.sas.upenn.edu/~egme/index.html

Martin Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

420 W. 118th Street
1022 International Affairs Building, MC 3308
New York, NY 10027
United States
212-851-4008 (Phone)
212-854-8059 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
206
Abstract Views
1,328
rank
163,183
PlumX Metrics