Collapsing Exchange Rate Regimes: Shocks and Biases

21 Pages Posted: 23 May 2011

See all articles by Linda S. Goldberg

Linda S. Goldberg

Federal Reserve Bank of New York; National Bureau of Economic Research (NBER)

Date Written: September 1988

Abstract

Patterns in domestic credit creation stemming from inconsistent fiscal policies have received widespread attention for aggravating speculative attacks on central bank foreign exchange reserves and contributing to the collapse of exchange rate regimes. This paper acknowledges the importance of monetary and fiscal discipline, but also emphasizes the importance of other random shocks to the domestic money market, most notably shocks from external credit supplies and relative prices. Policies of the domestic fiscal authorities are only partial catalysts for speculative attacks on a currency. Expansion of domestic credit stemming from the monetization of fiscal imbalances may be dominated by involuntary domestic credit expansions necessitated by surprise shortages in supplies of external capital. Further, the unexpected availability of external capital translates into a lower net critical reserve floor, making the depletion of central bank reserves by a speculative attack more difficult to accomplish. Also of considerable importance are relative price shocks which directly influence the probability of collapse by randomizing the demand for nominal money balances. Empirical studies of exchange rate crises that neglect these considerations will produce biased estimates of both expected collapse probabilities and anticipated post-collapse exchange rates.

Suggested Citation

Goldberg, Linda S., Collapsing Exchange Rate Regimes: Shocks and Biases (September 1988). NBER Working Paper No. w2702. Available at SSRN: https://ssrn.com/abstract=1849473

Linda S. Goldberg (Contact Author)

Federal Reserve Bank of New York ( email )

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New York, NY 10045
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212-720-2836 (Phone)
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National Bureau of Economic Research (NBER)

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