The collapse of the fixed exchange rate regime with sticky wages and imperfect substitutability between domestic and foreign bonds

Contagious Currency Crises

“…For instance, Willman (1988) and Goldberg (1993) endogenized relative prices, allowing events abroad to influence the real exchange rate and domestic competitiveness. Flood and Garber (1984a) and Claessens (1991) introduced uncertainty about the domestic policy process.…”

The EMS Crisis in Retrospect

“…Extensions of the model (e.g. Willman 1988) relaxed this assumption and showed how the run-up to a speculative attack driven by excess demand would display growing real overvaluation along with the progressive depletion of reserves.…”

Currency crises: introduction of spot speculators

“…In economic terms it means that the shadow exchange rate (exchange rate that would have prevailed in the absence of both government and speculator) depreciates on average at rate u. Equations (1) and (2) represent a somewhat simplified version of a model by Willman (1988). Equation (1) is the accounting identity…”

“…The reasons why the shadow exchange rate may deviate from the fixed parity can be various. For example, government deficit, triggering inflationary policy as in Krugman (1979); wage demands, hindering competitiveness of domestic exports as in Willman (1988); or adverse shock to world interest rates, can all make the fixed exchange rate inconsistent with long run equilibrium. Equation (2) is a simple way of modelling the shadow exchange rate without committing oneself to one particular scenario.…”

“…The framework of this paper is based on Willman (1988) 2 . Willman's model is a close substitute to Flood and Garber model insofar as the logic of the attack is the same, that is speculative attack is caused by a portfolio shift and there is no exchange rate jump.…”