SPECULATIVE ATTACKS - THE ROLES OF INTERTEMPORAL SUBSTITUTION AND THE INTEREST ELASTICITY OF THE DEMAND FOR MONEY

The effects of an anticipated speculative attack and exchange rate regime collapse brought on by an unsustainable mix of domestic credit and exchange rate policies is examined. A maximizing model with money demand motivated by a transactions technology which implies that increased money holdings reduce transactions costs associated with consumption good purchases is used. It is demonstrated that the effects of an impending speculative attack depend crucially on two margins through which the forward-looking behavior of rational consumers manifests itself. the intertemporal elasticity of substitution in consumption and the interest elasticity of the demand for money.