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".
The views expressed in this publication are those of the authors and do not necessarily reflect the views of the BIS or its member central banks.
