The timing of exchange rate collapse

Abstract

Recent episodes of exchange rate collapse have renewed interest in models of speculative attacks. These episodes have been considered by some observers to be inconsistent with “fundamentals” models of attack since there was no prolonged period of policy misalignment and declining reserves, as required by such models. This paper develops a fundamentals model in which collapse is instantaneous at the time of unexpected policy change and/or a change in the expectations of future policy, even for a reserve abundant country.