Speculative Attacks, Forward Market Intervention and the Classic Bear Squeeze
IMF Working Papers, December 1, 1997
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- Speculative Attacks, Forward Market Intervention and the Classic Bear Squeeze
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Bibliographic details
- Authors: Subir Lall
- Published: December 1, 1997
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451980202.001
Summary
- A typical strategy used by speculators to launch an attack on a fixed exchange regime is the use of forward markets.
- Central banks also intervene in forward markets to counter speculation.
- The paper addresses how an attack is launched on the forward market, and what the optimal policy response to such speculation is in the forward and spot markets.
- The paper demonstrates how central banks can impose a bear squeeze on speculators.
- Recent events in South East Asian currency markets are interpreted within the framework of the model’s predictions.
Key findings and analytical focus
- Mechanisms by which speculators use forward markets to attack fixed exchange regimes.
- Role and effectiveness of central bank intervention in forward markets as a counter to speculation.
- Conditions and tactics for imposing a bear squeeze on speculators.
- Application of the model to recent events in South East Asian currency markets.
Policy implications and optimal responses
- Analysis centers on identifying the optimal policy response to forward-market speculation in both forward and spot markets.
- Central bank intervention strategies in forward markets are evaluated as tools to counter speculative attacks.
- Implicit policy recommendation: central banks can use forward-market interventions and strategies that can lead to a bear squeeze to deter or counter speculators (as demonstrated by the model).
Subject areas and keywords
- Subjects: Banking, Commercial banks, Currencies, Currency markets, Exchange rate arrangements, Exchange rates, Financial institutions, Financial markets, Foreign exchange, Money
- Keywords: capital loss, central bank intervention, Commercial banks, Currencies, Currency markets, East Asia, Exchange rate arrangements, exchange rate crisis, Exchange Rates, fixed cost, forward market, forward market intervention, Forward Markets, forward rate, interest rate, interest rate target, long position, market condition, market corner, Market Corners, market forward rate, money stock, South Asia, Speculative Attacks, spot market, Thai baht, WP
Content in this bundle
- Speculative Attacks, Forward Market Intervention and the Classic Bear Squeeze - WP/97/164