Rational and Self-Fulfilling Balance-of-Payments Crises

26 Pages Posted: 28 Jun 2004 Last revised: 25 Jul 2022

See all articles by Maurice Obstfeld

Maurice Obstfeld

University of California, Berkeley; Peterson Institute for International Economics; National Bureau of Economic Research; Centre for Economic Policy Research

Date Written: November 1984


The recent balance-of-payments literature shows that-speculative attacks on a pegged exchange rate must sometimes-occur if the path of the rate is riot to offer abnormal profit opportunities. Such attacks are fully rational, as they reflect the market's response to a regime breakdown that is inevitable.This paper shows that, given certain expectations about policy, balance-of-payments crises can also be purely self-fulfilling events. In such cases even a permanently viable regime maybreak down, and the economy will possess multiple equilibria corresponding to different subjective assessments of the probability of collapse. The behavior of domestic interest rates and foreign reserves will naturally reflect the possibility of a speculative attack. Work on foreign-exchange crises derives from the natural-resource literature initiated by Salant and Henderson (1978),where the definition of "abnormal" profit opportunities is straightforward. Because the definition is not always straight-forward in a monetary context, this paper also shows how crises occur in a discrete-time stochastic monetary model when an eventual breakdown is inevitable.

Suggested Citation

Obstfeld, Maurice, Rational and Self-Fulfilling Balance-of-Payments Crises (November 1984). NBER Working Paper No. w1486, Available at SSRN: https://ssrn.com/abstract=334305

Maurice Obstfeld (Contact Author)

University of California, Berkeley ( email )

530 Evans Hall #3880
Berkeley, CA 94720
United States

HOME PAGE: http://www.mauriceobstfeld.com

Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research ( email )

United Kingdom