The value of t* depends on the magnitude of the deficit being financed (ф), the monetary policy used to finance it, and the debt threshold Ф. Since the government increases the money supply at time T, Pt will, in general, be greater than S. This suggests that t* < T, that is, the attack takes place before the new monetary policy is implemented. In fact this is the case that arises in the calibrated versions of our model economy. However, there are two other cases to consider: t* = 0, and t* > T.u

The first case, t* = 0, arises when MT is large enough that the rate of inflation at time zero is higher than ц. The relatively high rate of inflation at time 0 induces agents to lower their consumption thus creating a fall in money demand and a rise in government debt. If the rise in debt is large enough to trigger the threshold rule then a speculative attack occurs immediately. The exchange rate will, in general, be discontinuous at time 0. See Subsection 4.3 for further discussion other.

The second case, t* > T, occurs for large values of Ф. The exchange rate is still fixed at T and the endogenous level of the money supply is equal to M. With a constant money supply no seignorage revenues are collected at T. Even though the government prints money and buys back government bonds, the money supply remains unaffected. This is because private agents reverse the effects of the open market operation by trading money for bonds. The money supply only changes at t*. at which point it drops to M* = cS. Thereafter the growth rate of the money supply and the rate of inflation are both equal to /i. The time of the speculative attack is determined by the requirement that the government’s intertemporal budget constraint (2.8) holds.

The final step in computing t* is to ensure that с is consistent with the household’s budget constraint, (2.4) and that monetary policy raises sufficient revenues to balance the government’s budget constraint:

The term (c — cT) represents the adjustment in real balances that takes place at time T in response to the discontinuous decline in inflation to its new level, ц.

It is evident from (3.14) that there is a continuum of (Мт,ц) combinations that satisfy the government’s budget constraint. If we fix Mt we can then solve for the values of с and )i that simultaneously solve (2.4) and (3.2). Proceeding analogously we can fix /1 and solve for с and Mr- Since it is not possible to carry out these steps analytically we now turn to calibrated versions of the model.

Numerical Experiments

Here we study the determinants of speculative attacks in versions of our the model that have been calibrated using Korean and Thai data.

Model Calibration

Table 1 summarizes the parameter values of our benchmark models. Throughout we use 1996 as the baseline period for time series that are sampled at annual frequencies. In addition we normalize both output and the time 0 exchange rate, S, to be one.

The value of t* depends on the magnitude of the deficit being financed (ф), the monetary policy used to finance it, and the debt threshold Ф. Since the government increases the money supply at time T, Pt will, in general, be greater than S. This suggests that t* < T, that is, the attack takes place before the new monetary policy is implemented. In fact this is the case that arises in the calibrated versions of our model economy. However, there are two other cases to consider: t* = 0, and t* > T.u The first case, t* = 0, arises when MT is large enough that the rate of inflation at time zero is higher than ц. The relatively