The Role of Domestic and Foreign Investors in a Simple Model of Speculative Attacks

24 Pages Posted: 3 Mar 2006

See all articles by Dennis P. J. Botman

Dennis P. J. Botman

International Monetary Fund (IMF) - Fiscal Affairs Department

Cees G. H. Diks

University of Amsterdam - Faculty of Economics and Business (FEB); Tinbergen Institute

Date Written: October 2005

Abstract

We introduce local and foreign investors in a simple model of speculative attacks. Local investors have less tolerance for overvaluation of the fixed exchange rate because they tend to incur lower costs when taking a short position and possess better information, and because of moral hazard created by discriminatory government guarantees. On the other hand, the prospect of higher taxation after a balance of payments crisis deters speculation by locals compared to foreign investors. Finally, the lower the degree of exchange rate pass-through, the more likely domestic investors are to take the lead during capital flight.

Keywords: Location of Investors, Speculative Attacks, Private Information, Government Guarantees, Taxation, Exchange Rate Pass-Through

JEL Classification: F32, F34, D84

Suggested Citation

Botman, Dennis P. J. and Diks, Cees G. H., The Role of Domestic and Foreign Investors in a Simple Model of Speculative Attacks (October 2005). IMF Working Paper No. 05/205, Available at SSRN: https://ssrn.com/abstract=888074

Dennis P. J. Botman (Contact Author)

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

Cees G. H. Diks

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 53 29 (Phone)
+31 20 525 4349 (Fax)

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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