ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Financial Openness, Shadow Floating Exchange Rates and Speculative Attacks

Both the literature as welt as the evidence on speculative attacks in foreign exchange markets provide important lessons for managing an exchange rate regime. Balance of payments crises, rather than being exogenous shocks, could well be the equilibrium outcome of maximising behaviour by rational agents faced with a fundamental inconsistency between monetary and exchange rate policies. The longer the delay in bringing about such consistency between monetary, fiscal and exchange rate policies, the higher will be the potential costs of an eventual adjustment when ultimately faced with the inevitable regime collapse.

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