Models of Speculative Attacks and Crashes in International Capital Markets

Abstract

Currency and financial turmoils in international capital markets have been the focus of an extensive theoretical research which started around 30 years ago. This paper provides a synthetic overview of this theoretical modeling. We analyze the basic analytical framework corresponding to the dominant theoretical approaches, and discuss their extensions to include the …financial sector, contagion across markets and countries, capital ‡flows and borrowing constraints, strategic interactions among agents and equilibrium selection. In the final section we focus on the relevant policy issue of crisis prevention and optimal foreign regime choice in a world of full …financial integration.

Keywords: Exchange Rate Regimes, Speculative Attacks, Currency Crises, Financial Crises, Global Games

JEL Classification: F30, F31, F32,F33, F41, G01, C70