Speculative Attacks under Different Monetary Regimes

Description

This paper investigates the vulnerability of the central bank to speculative attacks on its currency under three different monetary policy regimes: the inflation targeting regime, the exchange rate targeting regime and the domestic price level targeting regime. This project develops a general equilibrium model in a small open economy which emphasizes that under inflation targeting, the central bank is vulnerable to speculative attacks on its currency, and the paths of collapse of the major economic variables resemble those under the exchange rate targeting regime and the domestic price level targeting regimes.The purpose of this paper is to investigate whether quantitatively there is much difference in the behaviour of economic variables between inflation targeting and exchange rate targeting under conditions which must ultimately lead to a speculative attack. Such conditions continue to arise in emerging economies. In most of these economies, the government budget remains a source of instability while seigniorage remains an important source of government financing.