Reverse Speculative Attacks

25 Pages Posted: 7 Jun 2016

See all articles by Manuel Amador

Manuel Amador

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Javier Bianchi

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Luigi Bocola

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Fabrizio Perri

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Date Written: June 2016

Abstract

In January 2015, in the face of sustained capital inflows, the Swiss National Bank abandoned the floor for the Swiss Franc against the Euro, a decision which led to the appreciation of the Swiss Franc. The objective of this paper is to present a simple framework that helps to better understand the timing of this episode, which we label a "reverse speculative attack". We model a central bank which wishes to maintain a peg, and responds to increases in demand for domestic currency by expanding its balance sheet. In contrast to the classic speculative attacks, which are triggered by the depletion of foreign assets, reverse attacks are triggered by the concern of future balance sheet losses. Our key result is that the interaction between the desire to maintain the peg and the concern about future losses can lead the central bank to first accumulate a large amount of reserves, and then to abandon the peg, just as we have observed in the Swiss case.

Suggested Citation

Amador, Manuel and Bianchi, Javier and Bocola, Luigi and Perri, Fabrizio, Reverse Speculative Attacks (June 2016). NBER Working Paper No. w22298, Available at SSRN: https://ssrn.com/abstract=2790695

Manuel Amador (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

Javier Bianchi

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

Luigi Bocola

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
STANFORD, CA 94305-6072
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Fabrizio Perri

Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

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