Does It Pay to Defend against a Speculative Attack?
Does It Pay to Defend against a Speculative Attack?
This chapter compares the behavior of failed and successful defenses of pegged exchange rates. It shows that the costs of unsuccessful defense against an attack on a currency system are large, about one year of economic growth or three percent of gross national product. The analysis also reveals that the difference in output losses between successful and unsuccessful defense is only significant for just one year. This finding can help account for a number of observations about the behavior of open economies and their policy makers.
Keywords: pegged exchange rates, economic growth, gross national product, output losses, open economies
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