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4
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2014

ASIAN CURRENCY CRISIS: Results 3

Next we consider how uncertainty about ф affects the time of the speculative attack. Table 3 presents results for ф = 0.1 and ф = 0.4. Note that the time of the attack is relatively insensitive to ф, ranging from 1.94 to 2.20. In contrast /i ranges from 0.0455 to 0.0725. Table 4 presents results for ф — .22 and ф = 0.28. We considered this narrow range of variation for ф because, in our model economy, the government cannot raise more than 3 percent of GDP in seignorage through a jump in the money supply at time T. Note that both t* and Mt/M are relatively sensitive to variations in ф. But it is still the case that the attack continues to take place before T in all these experiments: t* ranges from a low of 1.75 to a high of 2.67.

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We now study the sensitivity of our results to the threshold parameter Ф. Regardless of the particular threshold rule that the government adopts, its intertemporal budget constraint must hold. As discussed above, an increase in Ф reduces seignorage revenues. The government must compensate for the loss of these revenues by either raising MT or /j. Figure 3 depicts the time of the attack and the adjustment in monetary policy as Ф varies from 0.04 to 0.15. Panel A pertains to the case where MT is fixed and the adjustment occurs via fi. Panel В refers to the case where ji is held fixed and the adjustment occurs via Mt-The key points to note are as follows. First, regardless of how monetary policy is adjusted, t* is an increasing function of Ф. Basically, this reflects the fact that the government can delay the date of the speculative attack by borrowing more resources. Second, both My and //, are increasing functions of Ф. It turns out that as MT increases, the peak rate of inflation in time interval 2 also increases.

Consequently the cost of delaying the attack when monetary policy adjusts via an increase in MT is higher inflation during the transition to the new steady state of the economy. As ц increases, so too does the steady state rate of inflation. We conclude that the price for delaying a speculative attack is a higher rate of inflation in the future. This suggests that the key issue is not whether governmerits can borrow to fend off speculative attacks, but whether they should. To examine this issue we proceed in two steps. First, we briefly consider the equilibrium of our model when the only constraint faced by the government is (2.8), its intertemporal budget constraint. In Section 5, we discuss the optimal policy for the government to pursue.

The Present Value Rule

We now consider the equilibrium of the model when the government operates under a present value rule, i.e. (2.8) is the only constraint that the government faces. We proceed by asking the question: what is the maximal value of Ф consistent with (2.8)? In one sense we have already answered this question. Given the parameters of monetary policy (MT and fi), there is a unique Ф such that (2.8) holds, so that the present value rule can always be described ex post as a threshold rule on government debt.

Suppose that we fix one of the monetary policy parameters, say /i. For every value of MT there exists a value Ф such that (2.8) holds. We can ask the question: what is the value of MT that maximizes Ф? For our benchmark case we obtain roughly MT/M = 100.

Next we consider how uncertainty about ф affects the time of the speculative attack. Table 3 presents results for ф = 0.1 and ф = 0.4. Note that the time of the attack is relatively insensitive to ф, ranging from 1.94 to 2.20. In contrast /i ranges from 0.0455 to 0.0725. Table 4 presents results for ф — .22 and ф = 0.28. We considered this narrow range of variation for ф because, in our model economy, the government cannot raise more than 3 percent of GDP in seignorage through a jump in the money supply at time T. Note that both t* and Mt/M are relatively sensitive to variations in ф. But it is still the case that the

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Kevin J. Brandon

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