Currency attack/defense with two-sided private information

Abstract

A currency attack fails on its own when the speculator suffers from her financial problem. This paper extends the existing models and argues that the monetary authority?s willingness to peg and the speculator?s cost of attack are private information. Our model thus accounts for the duration of currency attack/defense, and more importantly, allows for failed attack. We employ an asymmetric war of attrition and gauge the time when the speculator stops attacking, or when the monetary authority de-pegs. Comparative static results throw light on the interest rate policy amidst the Exchange Rate Mechanism Crisis and the Asian Currency CrisisAsymmetric war of attrition; Credibility of policymakers; Failed speculative attack; Persistent effect; Two-sided private information