Currency appreciation and currency attack - Imperfect common knowledge
This paper analyzed a model of currency attack, in which the domestic currency is pegged below its value and the real value of the currency increases gradually. The speculators, who know that the peg which might be abandoned in the future when foreign reserves reach a certain threshold can attack...
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| Main Author: | |
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| Format: | Article |
| Language: | English |
| Published: |
VNU
2014
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| Subjects: | |
| Online Access: | http://repository.vnu.edu.vn/handle/11126/4665 |
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| Institution: | Vietnam National University, Hanoi |
| Language: | English |
| Summary: | This paper analyzed a model of currency attack, in which the domestic currency is pegged
below its value and the real value of the currency increases gradually. The speculators, who know that
the peg which might be abandoned in the future when foreign reserves reach a certain threshold can
attack the currency so that the peg will collapse and the revaluation takes place immediately after the
attack. The model is based on the fact that China had continuously to revalue its currency from 2005 to
2008, then in 2010, and will likely to revalue the Yuan in the near future under the pressure of its major
trading partners. With the assumption of imperfect common knowledge among agents, there is a unique
equilibrium in which the currency attack will occur. |
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