Contagious speculative attacks

During the European exchange market turmoil in 1992-93 it was evident that speculative attacks tended to spread across currencies. Using a twocountry version of the model developed by Flood and Garber (1984) we show how a speculative attack against one currency may accelerate the "warranted" collapse of a second parity. More importantly, even if the parity of the second currency is viable in the absence of a collapse of the first one, it might be subjected to a speculative attack if the reserves available to defend the parity are "small".

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