Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Bretton Woods system wikipedia , lookup
Currency War of 2009–11 wikipedia , lookup
Foreign exchange market wikipedia , lookup
International monetary systems wikipedia , lookup
Currency war wikipedia , lookup
Foreign-exchange reserves wikipedia , lookup
Purchasing power parity wikipedia , lookup
Fixed exchange-rate system wikipedia , lookup
NBER WORKING PAPER SERIES COMPETITIVENESS, REALIGNMENT, AND SPECULATION: THE ROLE OF FINANCIAL MARKETS Maurice Obstfeld Working Paper No. 2539 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 March 1988 Presented at the Conference on the EMS, Perugia, October 16—17, 1987, organized by the Banca dItalia, the Centre for Economic Policy Research, and the Centro Interuniversitarlo Studi Teorici per la Politica Economica. The research reported here is part of the NBERS research program in International Studies. Any opinions expressed are those of the author and not those of the National Bureau of Economic Research. NBER Working Paper #2539 March 1988 CornpetitivenessRealignment, and Speculation: The Role of Financial Markets ABSTRACT Current and capital accounts of France and continued viability of the realignment followed to date (EMS). This external planned measures liberalizing the Italy call policy in the of into question the periodic exchange-rate European Monetary System paper is intended as a first step in studying the real and monetary effects of EMS-style realignments in free cross-border financial flows. The a first set derived concerns a situation in which there are no setting of of results fundamental factors behind domestic inflation. Under a policy regime in which domestic inflation automatically triggers devaluation, the economy can undergo self-fulfilling depreciation-inflation spirals, triggered by speculative attack on the exchange rate. Such spirals do not occur when realignments do not offset past inflation fully. The second set of results shows how an exchange rate collapse can occur after inflation is set off by expansionary fiscal policy. Sometimes, but not always, the crisis will be preceded by a period of capital inflows and real currency appreciation. In other cases fiscal expansion may set off an immediate crisis. Maurice Obstfeld National Bureau of Economic Research 1050 Massachusetts Avenue Cambridge, MA 02138 (617) 868-3900, ext. 33 Introduction Since its March inauguration in the 1979, mechanism of the European Monetary System exchange-rate has (EMS) functioned with the aid of frequent currrency realignments--to date, than one per year on average. In the eyes of many more the observers, strategy of frequent realignment has allowed the system to survive in spite of the rather divergent macroeconomic policies pursued by the "Big Three" of the EMS, France, I and Germany, An Italy. apparently critical element in minimizing the financial disruption caused by realignments has financial flows been the maintained by France and onshore-offshore interest differentials currency crises suggest that control over The Italy. that have emerged capital controls have French and important role in insulating the systems from the full force of speculative Current cross-border France and Italian financial capital movements. Italy call into external question the continued viability of a widely-understood EMS policy of realignment. Yet the speculative that attention in the academic literature.2 The the role parity changes puzzling: empirically, an response of area expected parity change is play in during played an and planned measures liberalizing the capital accounts of large flows capital has periodic to received little relative neglect of balance-of-payments crises is devaluation fears are the leading- -factor behind currency flight, inflows are often inspired by hopes of a just leading- -perhaps as revaluation. speculative A further shortcoming of the existing literature is that, for the most part, it stops short of analyzing the possible real macroeconomic effects of exchange-rate crises. This paper is intended as a first step in studying the real and monetary effects of EMS-type realignment policies in a setting A financial flows. of free cross-border simple model that serves as the paper's analytical framework is sketched in Section 1. precise question then asked What is: kinds arise when markets expect a loss of home foreign goods to lead to realignment? of The equilibria can against competitiveness Although much work remains to be done, the results of a preliminary investigation are quite suggestive. The first set of results, described in Section 2, concerns a situation in which there are no fundamental fiscal expansion) behind domestic inflation. factors as (such Section Instead, analyzes the economy's behavior under exchange-rate rules 2 that allow cumulative inflation to trigger realignment automatically. The key finding is that such rules can induce multiple equilibria. Specifically, if realignment is expected to maintain external competitiveness, enhance or the economy has two equilibria. these involves an inflationary spiral in which speculators collapse of the fixed exchange rate currency to its new peg. and a One of force a depreciation of the When realignment is expected to aim at a real appreciation of the domestic currency, however, there is only one equilibrium: These mobility, the inflation-depreciationspiral cannot occur. results suggest that under conditions of a systematic realignment policy may have effects--in financial markets, in the output and capital disruptive labor markets, and on domestic inflation. Although the results are model-specific and therefore should not be taken too literally, they also provide a rationale for the offsetting differential A recent EMS practice of only partially inflation through currency realignment.3 second set of results, explained in Section 3, studies inflation expected realignment in a setting where domestic price is already being driven by fundamentals (here, fiscal how The possible equilibria of the economy depend on authorities attempt to offset past expansion). the fully inflation through currency If devaluation is large relative to past inflation, depreciation. an exchange-rate collapse occurs as soon as an expansionary fiscal policy is enacted, but before any real appreciation has In the face of smaller devaluations, the fixed exchange rate domestic inflation for coexist with occurred. some time can before the setting for inevitable collapse occurs. 1. The Mode]. A simple model with sticky output prices is the the discussion; in line with the financial likely evolution of arrangements within the EMS, perfect capital mobility is Three basic hypotheses are (1) that the exchange rate entirely through the interventton of the home that the a sense to be made precise fixed exchange rate must temporarily) once this capacity has been pegged and model on These exhausted. which more (3) least (at hypotheses do not square perfectly with the facts of the EMS, they lead to a useful benchmark (2) defend to below), abandoned be is central bank, that the home central bank has only a limited capacity the exchange rate (in assumed. but realistic analyses can be built. The analytical framework is the overshooting model Dornbusch (1976) and Mussa (1977), as set out Obstfeld and Stocknian (1985). In the in the of survey by following description, variables other than interest rates are natural logarithms, and a variable such as Dz(t) is the (right-hand) time derivative of time t. Perfect z at foresight is assumed, so no distinction is made between actual and expected rates of change. substitution between With free capital mobility and perfect domestic- and onshore the foreign-currency bonds, domestic interest rate, i(t), is related by interest parity to the i*, depreciation, De(t): (1) i(t) — the and foreign rate, expected rate of (fixed) domestic currency i* + De(t). The exchange rate e(t) is the price of foreign currency in terms of domestic. If m(t) is the home money supply, the y domestic output, and p(t) the money price of level (fixed) output, of equilibrium in the money market occurs when (2) m(t) - p(t) Let p* be — -yy the - Ai(t). (fixed) foreign-currency price output, which is distinct from domestic output. of foreign Aggregate demand for domestic output is (3) d(t) — [p* + e(t) p(t)] - - [i(t) - Dp(t)]. Because the price of home output is sticky, aggregate demand and supply can differ in the short run. Imbalances in adjustment, however, the output market contribute and the model's to describe price dynamics. Let (t) to final element is an price equation denote the output price that 5 would currently clear the goods market; as in Mussa this (1977), price is defined as the solution to (4) y — p* + e(t) (t)] - - o'[i(t) Dp(t)J. - Then the inflation rate is given by (5) Dp(t) where 9 9[d(t) — - yl + Dp(t), inflation to measures the sensitivity of demand. The in second term equation discussion below, as it captures the pure effects of expectations zero. Then for a constant money stock, the exchange rate and price level are p(t), the inflationary on the price level. that i*, y, and p* are Assume now (for notational simplicity) stationary to central is (5) excess output value in, the stationary values of e() — p(') of the real exchange rate, x(t) — — is therefore x(v) — and in, p* 0. Under a floating exchange + the e(t) rate, are given dynamics of convergence to this long-run equilibrium the by the pair of differential equations (6) De(t) — [p(t) - (7) Dp(t) — 9[e(t) - e()J (see Obstfeld and Stockman, + ( - 9)[p(t) - p()} l985). Figures la and lb show the two possible configurations system described by the preceding two equations. model has the familiar saddlepath property: In each case the for any initial price level p(O), there is a unique equilibrium exchange rate e(O), consistent with the of the on SS, economy's eventual arrival at its zO p p() A (a) m p(o) e(a)me(O) (1< X&4) e A p (b) p()= e():m (i>X64) e 6 long-run position. Also shown in AA, which play saddlepaths diagrams are the important role an in the the "anti9 analysis below. The two roots of the system are 1/A and that a general solution takes (8) e(t) - e(o) — k1exp(t/)) (9) p(t) - p() where k = - - p(t) Setting k2 (11) — p(t) p() shown (l/A9)kexp(-8t), kexp(t/X) + kexp(-9t), Setting k — 0 gives the equation for (10) it can be the form are parameters determined by and k -9; — -A9[e(t) - initial conditions SS: e()]. 0 gives the equation for AA: — e(t). The unstable path AA thus coincides with a 450 ray from the origin. 2. Inflation and Realignment: Self-fulfilling Equilibria To focus on the pure effects of an anticipated realignment policy, the model abstracts in this section from all that might alter the long-run equilibrium level competitiveness. The model thus concentrates alone, and asks if conditions, on disturbances of external monetary factors even under these relatively uflcomplicated expected realignments can have disruptive effects on the macroeconomy. In particular, can expected realignments lead 7 to equilibria that look like inflation-devaluationspirals? The answer depends on the exchange rate. mechanism in to place fix the Here I assume that the policy authority allows the exchange rate to float once private capital outflows have reduced the domestic money stock to a positive lower bound of m0. Such a situation would arise, for example, if the central bank's external credit lines provided insufficient foreign exchange to outstanding domestic credit and if other tools purchase reducing the for domestic component of the monetary base were unavailable. policy authority must The realignment rule followed by the now be fixed at the level and that determined money stock e' the in — p is initially corresponding long-run price <To these prices there level is p. authority's exchange rate Imagine that the specified. + 7y corresponds an Ai* - — .) endogenously The rule is to devalue the currency to an exchange rate of > p. if the price level reaches the trigger value of > Suppose first that condition is authorities policy . e' that when p reaches The the trigger devalue the currency to a level that restores current external competitiveness of this point, the interpretation to its <at a minimum) long-run value. Clearly, one equilibrium of the model is the one in which nothing happens and the economy remains at the initial equilibrium, p — . p ever With no shocks disturbing markets, there e is no reason — for to reach its trigger level and bring the realignment policy into play. There is, Figure 2. generality, one.) <The however, a analysis henceforth assumes, that the configuration of Figure la In this equilibrium, illustrated in second equilibrium, of without loss is relevant the speculators mount an attack on the 0 0 E a) 0 E 0 currency rule becomes as soon as the realignment m capital outflows reduce the money supply to central bank to withdraw from the Private known. force and the the foreign exchange market: economy is know on an unstable path of the floating-rate system associated with a money supply equal to the minimal level m. The collapse results in a sharp currency depreciation [to e(O)], after ' which e and p rise together in an , When p reaches e — and rate at this new level if no Subsequently, inflation-depreciation spiral. the central bank can peg the exchange further realignment is expected.5 rising domestic prices erode any short-term gain in competitiveness as p rises to its new long-run level, p' — This second equilibrium is driven entirely by self-fulfilling expectations that there will be a crisis followed by inflation and a Since a speculative attack causes a realignment.6 depreciation of the domestic currency, each speculator has an incentive to join The immediate real in if he believes an attack is about to occur. currency depreciation helps pull trigger price level is reached. domestic prices jump in the asset-market so there is no need for exchange rate, equilibrium a the trigger price discrete anticipated which would be inconsistent with 1979). Although the (Krugman exchange-rate collapse causes an immediate real depreciation, in currency subsequently appreciates transitional the In this alternative equilibrium, the exchange rate reaches its new peg just as level is reached, until up float that precedes the real terms return to during the the realigned fixed rates. Perhaps surprisingly, there is first of the two described above- -when only ' < one , so equilibrium- -the that the authority realigns without attempting to offset fully the policy price 9 To inflation that has occurred in the past. Figure 3. see In the case shown there, the only consider this, exchange-rate paths avoiding a discrete jump at the moment of realignment call for an that drives the appreciation of the currency just after the attack central bank from the no occurs: speculator would individual profitable to participate. immediate This hypothesized speculative attack appreciation means that the fact never market. exchange find in it The economy thus remains at e — e, p — if it is believed that the realignment policy not will fully offset past inflation. To understand the difference between the present case and the last one, observe that the post-attack change in the exchange rate is influenced by two factors, (from to m0) the initial drop in the money supply the the expectation that ' in the pegged at the level be The first factor pushes the future. price of foreign currency downward after the pushes it upward upward.7 will exchange rate attack, second the dominates when The second factor the realigned exchange rate is more competitive because it is only by depreciating initially that the real exchange rate can be higher also when the central bank re-enters the foreign exchange market. The case are possible. exchange — a borderline case In this case, the given that p in which both equilibria authorities maintains that rate competitiveness, is is the at peg a nominal level of trigger point. The original the at initial speculative attack leaves the floating exchange its pre-attack level until p reaches p. , after rate at which e and p rise together along AA At this point the currency is again pegged and the economy is at a new stationary position.8 CD ml (DI CD 3 0 3 DDI DII 0 10 3. Attacks that Are Justified by Fundamentals The previous section established the existence of Central equilibria under an accommodative realignment rule. the discussion was the form precise of the exchange-rate rule: under alternative rules the disappear. multiple to authorities' multiplicity can If the policy rule is to realign only after the real the exchange rate has appreciated by a given amount, for example, inflationary paths of the previous section are no longer supported by the policy rule, because the attack that sets off the inflation leads to a temporary gain This in competitiveness, section demonstrates how not a prospective loss in external competitiveness (In contrast, due can attacks speculative nonetheless occur when realignment is prompted by factors. loss. current a fundamental to the inflations prompting the or realignments described in the previous section were entirely the result of the Once again, the behavior of the model prospect of accommodation.) turns on the degree to which the authorities attempt to offset inflation through devaluation. Under the posited conditions of a interest parity, fixed exchange rate continuing domestic-credit expansion by and the authorities would lead to steady foreign reserve loss rather than to real currency appreciation. I therefore assume that the of real appreciation is, instead, fiscal. With a source fixed exchange rate and a sticky price level, fiscal expansion induces temporary excess output demand and thus a appreciates the currency in real output-market equilibrium. gradual price-level rise terms and that eventually restores The specific scenario analyzed is one but the in which fiscal expansion sets off domestic inflation, market expects the policy authority to devalue some time before i-i the full upward adjustment of the home price level is complete. The model used in the previous sections can allow for aggregate-demand shocks such as Write the aggregate-demand equation as d(t) where g is — [p* a e(t) + p(t)] - demand-shift p() 0.) + — -g/, Dp(t)J - The p() — m, e() extended to shifts. fiscal-policy o'j:i(t) factor. floating-rate model becomes - - (3) be + g, of steady state — m - g/, x() e() for any constant money supply m. (Recall that p The equation of the unstable linear path AA is now p(t) g/: a rise in g causes the — e(t) a parallel leftward shift of AA in Figures Ia and lb. Figure 4 shows one example of how the economy can react to fiscal stimulus followed by realignment. Initially g — 0 and the long-run values of the price level and exchange rate are shown p and e; a rise in g sets prices moving upward. money supply must also rise over time, as intervention, a to maintain equilibrium in the long as the exchange rate remains fixed at vertically toward point E, the , the , official "anti" So market.) the economy moves new long-run position that eventually be reached In the absence of an Point E lies on A'A' money as nominal (The result of a would exchange-rate change. saddlepath associated with a permanent level g of the demand-shift parameter. Assume now that the market expects the authorities to realign the exchange rate at once the price level reaches . In this case an attack occurs at point F, so that the economy is placed on a path of the floating-rate system associated with the minimal money supply m0 <and the saddlepath 5' S'). The equilibrium path is a- w 1°- 0 E S. U) 1W 1W E 12 reaches at jump in a takes place No discrete . ' just reaches the unique one with the property that a as p moment the of re-pegging (though there is a sharp capital inflow that raises m), and the economy converges afterward to point C as inflation falls on Clearly the devaluation has no long-run effect to zero. cause a real exchange rate, but it does the long-run price higher level. Two features of the path First, even though the described deserve emphasis. just attack eventual is there is an initial period following the fiscal In which prices rise, the capital account is exchange rate remains fixed. real Second, competitiveness continues inflows and crisis in the late occurs , which itself has a 45° after a slope). steady deterioration in contrast to the example of the last is l970s. the during transitional period of floating (since p is rising faster below A'A' the stabilization plans deteriorate to and surplus, external accompanied the undertaken in Latin America's Southern Cone during impulse The pattern of capital currency appreciation followed by reminiscent of events that perfectly foreseen, Thus, than e realignment competitiveness, in the real section. exchange rate first depreciated (as a result of There, then collapse), appreciated as realignr3nt approached. As Figure 5 shows, possible. In Figure for a devaluation so other however, 5, the authorities' adjustment paths realignment large that competitiveness is restored to its original, pre-fiscal-expansion, case the fiscal expansion sparks nominal currency depreciation to 4 an policy calls (temporarily) level. immediate collapse point F. tmn1ete1v The are In this and a associated real reversed durins the I0 w 0 U) 0 E 13 e' transitional float that brings the economy to e re-pegging, there a is further loss inflation brings the economy to point in p , p. After as competitiveness Once again, there is G. ultimate gain in competitiveness as a result of the no exchange-rate change. The lesson of this example is to over-energetic attempt structural shift in the restore real expectation of an competitiveness despite a that exchange rate immediate run on the currency. Such runs real appreciation emerges, and the thus foundation in market fundamentals. may occur can set even to appear Nonetheless, off before an any without be are they the result of rational anticipations of future exchange-rate policy. The fiscal policy shock analyzed here is not the one only calling for a change in the long-run real exchange rate. A very plausible situation involves expected devaluation after an adverse shift in the demand for domestic exports. could have the advantage, n principle, a devaluation (Such of shortening the of recession that results from the shock.) A period puzzling result easy to verify using the techniques employed above: is In many cases an equilibrium does not exist. Obviously, much of the analysis above rests assumption of continu,us-time trading. would allow devaluations that were not A heavily on the discrete-time model preceded by transitional floats, although paths similar to those analyzed above would still be possible. Arguably, the continuous-time trading assumption reasonably close to reality. is 14 4. Implications and Extensions The model examined above is simple, but its implications stark. A through policy of attempting to real domestic inflation accommodate lead can devaluation rational-expectations equilibria. exchange crisis and a One to these of subsequent spiral of multiple involves inflation depreciation that ultimately leave the economy with a higher price level and exchange rate. partial In contrast, As noted in the a this introduction, an and permanently accommodation--if credible--precludes the equilibrium. are policy of inflationary reasoning may provide one rationale for the failure of EMS realignments to fully accommodate differential inflation in recent years.9 Exchange-rate crises can also in arise response realignments that attempt to offset inflation due to fiscal policy. Inflation and real appreciation may some time before a collapse occurs, collapse is anticipated by the expansionary continue for even though an A market. anticipated devaluation may, however, cause to eventual sufficiently large immediate attack an that itself postpones the inevitable real appreciation. The model used above clearly leaves many unanswered questions. For example, is a single-country analysis applicable to situations in which several EMS members may intervening to be defend a parity?10 A related question concerns the equilibria that arise when the authorities' ability to defend a limited in the manner assumed above, so that the and do purchase the entire money supply to rate. This possibility would appear to rate is not authorities can defend the exchange the multiple rule out equilibria of Section 2, but not obviously to preclude the attacks of Section 3, since the public could reduce its money holdings to 15 zero just before devaluation. At a deeper level, one must ask whether there policymaker preferences that might generate realignment rules examined in this paper. raise difficult problems for are the All of these economic analysis, but plausible types of questions they are central to understanding the present and prospective functioning of the EMS, Algebraic Analysis of Self-fulfilling Equilibria Appendix: algebraic analysis of An the of discussed in Section 2 clarifies some aspects self-fulfilling Such an analysis can be based on equations paths. solutions for the general the equilibrium inflationary dynamic (8) and (9), system describing the floating-rate model. find must one To construct an inflationary equilibrium, transition time T and constants k 1 and k2 such that e(T) — p(T) that — e(t) - m — kexp(t/A) - p(t) - m — kexp(t/)) + is, (l/AO)kexp(-9t), k2exp(-Ot), when the post-attack floating rate stickiness of is determined One initial condition is prices: p(O) , — So there parameters T, k1 are is given implicitly by A(T) — where ( - in ) (T) — three unknown 2 equation - a and k The solution for T (e' in given by conditions--one initial, two terminal--to determine the (12) and when e(t) and p(t) follow the equations system with money supply m. the e' a - (p - m)exp(-OT) m) + (l/AO)(p exp(T/A) - - m0)exp(-9T) exp(-9T) exp(T/A) + (l/A8)exp(-9T) the nonlinear 17 Note that as Figure 6 illustrates how T is determined by (12). - , ( A(T) - m)/(' - m) - at ' A(T) and B(T) is guaranteed. Intersections Thus, for intersection of least one realignment rules such that I, - while B(T) T are also some nonacconunodative realignment rules, of course, possible for but these do have to appreciate immediately after the speculative attack that sets off not define equilibria because currency would the the inflation. One case that is easy to analyze explicitly is the borderline case referred to in the text, in which . ' In case this the solution to (12) is — T Direct are Xlog[( ni0)/(p0 - is )]. calculation shows that the appropriate — k - - ni and k2 — 0, which imply initial that the conditions equilibrium floating exchange rate immediately after the attack is e(O) — the original peg. After the attack, the exchange rate moves toward its new peg along the path AA in Figure therefore 2. adjustment process is in this case a pure inflation that does affect relative output prices. The not TRANSITION T INTERVAL, t T Equilibrium 4(T) I B(T) A(T), 18 Footnotes *1 am grateful for helpful conversations with Cuillermo Calvo and in Stephen O'Connell; for critical comments from participants the Conference on the especially EMS, and Marcus Miller; for of suggestions I received in a seminar at the Research Department All errors are, however, my own. the International Monetary Fund. Financial support from the National Science Foundation and the Alfred P. Sloan Foundation is acknowledged with thanks. 1. Among recent experience of the EMS reviews are Collins (1987), Giavazzi and Ciovannini (1986), Rogoff (1985), and Ungerer et al. (1986). 2. Exceptions include Blanco and Garber (1986), Feenstra (1985), Gros (1987), and Obstfeld (1984). some of Feenstra's conclusions, setting more descriptive of As will become apparent below, although reached some in a financial developing economies than of Europe, are quite relevant for analyzing prospective developments in the EMS. 3. See, for example, Giavazzi and Pagano (1988). 4. Equations under (6) and (7) follow from (1), (2), and the fact price-adjustment rule (5), driven to its long-run value of zero Dx(t) 5. the real that exchange rate according to the is equation -Ox(t). A similar response to anticipated devaluation (1QS', 4r, f vihl nr,' mndel is of currency analyzed by substitution based on utility maximization. contrast to Notice that, in case discussed in Obstfeld (1984), the length of the transitional 6. transitional This is also true period of floating is endogenous here. of the example of the float analyzed in the next section. The alternative equilibrium provides another type of self-fulfilling crisis studied in my 1986 paper. of the self-fulfilling accommodative policies is The role studied in a different context by Corden (1986). 7. See, for example, Flood and Garber (1983) or Obstfeld and Stockman (1985). 8. An algebraic analysis is given in the Appendix. 9. A natural question multiple equilibria by is whether preventing, speculative reserve outflows. capital or Models of at controls least preclude minimizing, anticipatory wage and price setting, such as Calvo (1983), suggest a tentative negative answer. The question deserves a thorough analysis, however. 10. a For clear account of EMS intervention arrangements, paper by Mastropasqua, Micossi, and Rinaldi in this volume. see the References Herminio Blanco and Peter M. Garber, "Recurrent Devaluation and Speculative Attacks on the Mexican Peso" Journal of Political Economy 94 (February 1986), pp. 148-166. Cuillermo A. Calvo, "Staggered Contracts and Exchange Rate Policy," in Jacob A. Frenkel, ed,, Exchange Rates and International Macroeconomics. Chicago: University of Chicago Press for the National Bureau of Economic Research, 1983. Susan M. Collins, "PPP and the Peso Problem: Exchange Rates the EMS," manuscript, Harvard University, 1987. in the Current Account "Exchange Rate Depreciation, and Wages," Economic Record, Special Issue, 1986, pp. 14-21. W, Max Corden, and Exchange Rate Dynamics," Rudiger Dornbusch, "Expectations Journal of Political Economy 84 ( Decemebr 1976), pp. 1161-1176. Robert C. Feenstra, "Anticipated Devaluations, Currency Flight, American and Direct Trade Controls in a Monetary Economy," Economic Review 75 (June 1985), pp. 386-401, "A Model of Stochastic Robert P. Flood and Peter M. Carber, Process Switching," Econometrica 51 (May 1983), pp. 537-551. Francesco Ciavazzi and Albert Ciovannini, "The EMS and the Dollar," Economic Policy 1 (April 1986), pp. 455-485. Francesco Giavazzi and Marco Pagano, "The Advantage of Tying One's EMS Discipline and Central Bank Credibility," European Economic Review 32 (1988), forthcoming. Hands: Daniel Gros, "Tranquil and Turbulent Periods in the EMS and Centre Possibility of Self-fulfilling Crises," manuscript, 1987. Studies, European Policy the for Paul Krugman, "A Theory of Balance-of-Payments Crises," Journal of Money, Credit and Banking 11 (August 1979), pp. 311-325. Michael Mussa, "A Dynamic Theory of Foreign Exchange," in Michael J. Artis and A. Robert Nobay, eds., Studies in Modern Economic Analysis. Oxford: Basil Blackwell, 1977. Maurice Obstfeld, "Balance-of-Payments Crises and Devaluation," Journal of Money, Credit and Banking 16 (May 1984), pp. 208-217. Maurice Obstfeld, "Rational and Self-fulfilling Balance-of-Payments Crises," American Economic Review 76 (March 1986), pp. 72-81. Maurice Obstfeld and Alan C. Stockman, "Exchange-Rate Dynamics," in Ronald W, Jones and Peter B. Handbook of eds., Kenen, International Economics, vol. 2. Amsterdam: North-Holland, 1985. Rogoff, Kenneth, "Can Exchange Rate Predictability be Without Monetary Convergence? Evidence from the EMS," Economic Review 28 (June-July 1985), pp. 93-115. et al., The European Monetary System: Occasional Paper 48. Washington, International Monetary Fund, December 1986. Horst Ungerer Developments. Achieved European Recent D.C.: