EUROPEAN EL!XVIER European Economic Review 41 (1997) 847-860 Speculative attacks and macroeconomic fundamentals: evidence from some European currencies hci &ker *, Ceyla Pazarbapoglu zyxwvutsrqponmlkjihgfedc International M onetary Fund, 700 19th Street, N. W ., W ashington, DC 20431, USA zyxwvutsrqponmlk Abstract This paper evaluates the role of macroeconomic fundamentals in generating episodes of speculative pressures on six currencies of the European Exchange Rate Mechanism (ERM). The observed regime changes are first estimated by a set of speculative pressure indicators; the contribution of economic fundamentals are then examined by using the implications of the basic speculative attack literature. In general, episodes of speculative pressures appear to be associated with a deterioration in economic fundamentals only for some of the sample currencies, confirming the view that consistent macro policies are necessary but not sufficient to ensure the maintenance of an exchange rate peg. 0 1997 Elsevier Science B.V. JEL classification: B22; F33 Keywords: Exchange rates; Speculative attacks; Economic fundamentals; ERM 1. Introduction The emergence of intense pressures within the exchange rate mechanism (ERM) of the European Monetary System in 1992 and 1993 led to a suspension from the ERM and a devaluation of several European currencies, and a subsequent widening of the fluctuation bands for most ERM currencies. While the intensity of the crisis was unprecedented, the process underlying the crisis was neither new nor * Corresponding author. cpazarbasioglu@imf.org Tel.: 0014-2921/97/$17.00 Copyright PZZ SOO14-2921(97)00042-l (202) 623-7810 or (202) 623-6612; e-mail: iotker@imf.org 0 1997 Elsevier Science B.V. All rights reserved. or 848 zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFED 847- 860 ” I. Otker, C. Pazarbapog’lu / European Economic Review 41(1997) specific to the ERM. The turmoil of 1992-93 raised questions about the underlying causes of currency crises. The subsequent debate has revolved around two main ideas. According to one view, such crises are caused by inconsistent economic policies, and pure speculation is not enough to trigger a crisis. The second view attributes an important role to speculation, which, it claims, can trigger speculative attacks irrespective of the currency’s underlying economic fundamentals. Identifying the source of exchange market pressures has important implications for economic policy: if currency crises are indeed caused by fundamentals, the most effective way to prevent them is to pursue sound economic policies. If, on the other hand, self-fulfilling speculation can trigger crises regardless of fundamentals, there might be a case for specific measures to deter such speculation. This paper attempts to identify the respective roles of macroeconomic fundamentals and speculative pressures in various episodes of market pressures within the ERM and to evaluate whether these pressures were justified by a deterioration in economic fundamentals. The paper proceeds in two steps. First, it identifies whether the observed regime changes can be predicted by the presence of speculative pressures. Second, in order to identify the contribution of a deterioration in economic fundamentals to such pressures, it estimates the probability of a regime change as a function of such fundamentals by using a monetary model of speculative attacks. The latter outlines a process in which fiscal or financial imbalances may lead to an eventual collapse of the exchange rate peg by generating domestic credit expansions that initially cause a gradual erosion of the foreign exchange reserves ‘. The erosion of reserves is followed by generally self-fulfilling currency attacks as forward-looking investors engage in one-sided bets, anticipating the central bank to exhaust its reserves in defending its currency. Eventually, the peg can no longer be sustained and the prevailing regime collapses, involving either a discrete devaluation or a switch to flexible rates. The empirical results suggest that both economic fundamentals and speculative factors might have contributed to the observed regime changes for the sample currencies. While the currencies of two sample countries came under speculative pressure even though the empirical analysis did not predict any pressures associated with economic fundamentals, high probabilities of devaluations for the remaining currencies appear to be associated with episodes of increasing domestic credit, widening fiscal deficits, rising unemployment, inflationary trends in the ’ The speculative attack model was first suggested by Krugman (1979). formalized by Flood and Garber (1984) and Obstfeld (19861, and applied by Blanco and Garber (1986). Cumby and van Wijnbergen (19891, Willman (19891, Grilli (19901, Goldberg (1991, 1994), Fdin and Vredin (19931, and &ker and Pazarbasloglu (1996). Agtnor et al. (1992) and Blackbum and Sola (1993) provide for detailed reviews of these models. i. hker, C. Pazarbagtoglu/European Economic Review 41 (1997) 847-860 849 anchor country, and losses of foreign exchange reserves and external competitiveness. This mixed result might reflect in part the speculative nature of the foreign exchange markets, and in part the existence of other factors that cannot be captured by the basic speculative attack model. The remainder of the paper is organized as follows. Section 2 provides a brief description of the exchange rate policies in the sample countries. Section 3 attempts to identify the periods of speculative pressures by using a set of pressure indicators. Section 4 then evaluates whether some of these episodes can be attributed to a deterioration of macroeconomic fundamentals, and Section 5 examines the sensitivity of the results to the sample period. Section 6 concludes. 2. An overview of exchange rate policies in the sample countries This paper focuses on the experiences of six ERM countries, Belgium, Denmark, France, Ireland, Italy, and Spain, during the period 1979-1995. This choice allows one to test the performance of the monetary model for a set of countries that present somewhat different characteristics: Italy, Spain, and Ireland were often argued to have economic fundamentals inconsistent with their exchange rate regimes and experienced frequent realignments in their central parities. Denmark and France also experienced devaluations until 1987 and received attacks during the 1992 crises, although both were widely argued to have sound fundamentals. Belgium did not receive as much speculative pressure, particularly until after the widening of the bands, although some of its fundamentals were viewed as inconsistent with fixed exchange rates. Belgium, Denmark, France and Ireland became members of the ERM in March 1979, and Spain joined in June 1989. Italy was a member between March 1979 and September 1992. A summary of the devaluations and regime changes of the six countries is given in Table 1. Some of these ERM realignments involved a devaluation of a currency against all the other ERM currencies, while others involved a revaluation against some of the currencies in a general ERM realignment, but nevertheless resulted in an “effective devaluation” vis-‘a-vis the deutsche mark. 3. Identifying the episodes of speculative pressures Typically, periods immediately prior to a regime collapse in fixed exchange rate systems are characterized by increased deviation of the spot exchange rate from the central parity, high interest rate differentials, or a sudden decline in the level of official reserves (see Eichengreen et al., 1995). These factors can be considered as indicators of speculative pressure on exchange rates and viewed as Table 1 Devaluatmns and regime Realignment date September 1979 changes within and a general realig”menl I .96 percent in a general realignment in a general percent 5.21 perce”t 1.96 percent realignment 1982 June 1982 realignment 8.50 percent 1983 realignment and a general realignment 9.59 percent 4.08 percent reahgnment in a general realignment in a general 3.79 percent in a general in a general in a general 8.06 percent realignment reahgnment and a general realignment and a general 4.08 percent realignment in a general realignment realignment and a general 7.58 percent 2.84 percent _ 6.79 percent realignment 8.53 percent and a general realignment 7.58 percent realignment July 1985 and a general realignme”: 7.84 percent 1986 August 1986 klmuuy 1987 1.94 percent 1.94 percent m a general reahgnment in a general 5.83 percent realignment and a general 2.91 percent realignment in it general 2.91 percent realignment in a general realignment 8.00 percent 0.97 percent in a general January and a general 3.00 percent 4.08 percent m a general 8.06 5.21 percent 5.21 percent in a general April realignment 6.00 percent 1981 Febmaty in a general 4.76 percent 1981 October March realignment percent Spain IdY zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA I .% percent 4.76 percent 1.96 1979 November Ireland Denmark in a general March the ERM Belgium 2.91 percent realignment in a geneml 2.90 percent 2.91 percent realignment in a general realsgnment in a general 2.91 percent realignment 1990 in a general realignment 3.68 percent and switch from band to f 2.25% September 1992 6.54 percent & 6% band 5.00 percent and float November January 1992 6.00 percent 1993 10.00 percent M;tY I993 August 1993 8.00 percent wdenmg of ERM bands widening of ERM bands widenmg of ERM bands wtdenmg of ERM bands widening ERM March 1995 of bands 7.02 percent i. her, C. Pazarbqto@ u/European Economic Review 41 (1997) 847- 860 851 reflecting the behavior of market participants and the response of the monetary authority during speculative attacks. Episodes of exchange pressures may not always result in an adjustment in the exchange rate. Those that do may be considered as “successful attacks”, while those that do not may be viewed as attacks that could be resisted by the authorities. In order to identify the episodes of speculative pressures and the associated regime changes, this section estimates the one-step-ahead probability of a regime change as a function of these pressure indicators. To estimate the probability, it treats the central bank’s decision regarding a change in its exchange rate regime as a discrete variable, Y, which can take only two values: one, if there is either a devaluation or a switch to flexible rates, and zero, when the existing parity is maintained *. It then estimates the one-step-ahead probability of a regime change, r*, as a function of a set of explanatory variables using a Probit model, an approach commonly used in models with quantitative dependent variables. In this paper’s framework, the predicted value of the dependent variable can be interpreted as the probability of a regime change. The probability is estimated as: T, = Prob(Y=l) = rr[(i,-i;),(E-C),,logR,,AlogR,] (1) where i and i * denote short-term interest rates in the domestic and anchor country, respectively, (E - C) the deviation of the spot rate from the central parity, R official foreign reserves, and A the first difference operator. The Probit estimates of the one-period-ahead probabilities of a regime change are presented in Table 2 and the associated probabilities are graphed in Fig. 1. The estimates are based on monthly data over the period of ERM membership 3. For Belgium, Denmark, and Italy, a loss of foreign reserves and increased depreciation of the currency within the band appear to indicate a built-up of speculative pressures, while for France, Ireland and Spain the existence of pressures appear to be mainly associated with the depreciation of the spot rate within the band and hikes in domestic interest rates 4. The estimated devaluation probabilities also seem to track the actual devaluations reasonably well; in many cases, the probability peaks at the time of an actual devaluation. Results also indicate a built-up of pressures on the remaining ERM currencies after the widening of the bands. For Spain, these pressures eventually led to a devaluation within wider bands, while the central banks of France, Denmark, Ireland, and Belgium apparently resisted the pressures either by letting the exchange rate * The widening of the fluctuation bands is also treated as a regime change, since under the new system the currencies, are, in principle, allowed to move more freely within the much wider fluctuation bands. 3 The description of data and sources are provided in the Appendix. 4 The coefficient of the deviation of the spot rate from the central parity is negative for Ireland, since the exchange rate was expressed as the price of the Irish pound in terms of the mark. Table 2 Estimation results for one-step-ahead probability Belgium Vanables of devaluation using Constant 7.256 ’ - I.046 (- 10.351 * 0.92) (- - 0.094 ( - 0.20) - 4.295 - 1.337 1.51) ( - 0.54) 11.008 6.47 I ’ * - 13.996 (- (1.85) -0.830 (- *’ 17.170 1.84) - - 6.588 (- 1.06) * 0.569 (2.57) ’ 0.048 0.106 0.221 (1.98) (2.42) (0.73) (2.32) 0.13 0.20 0.05 0.29 1.092 In L - 25.86 - 28.88 - 23.45 - 26.86 - 32.34 - 10.73 ln L, h - 33.42 - 36.47 - 30.16 - 36.47 - 31.66 - 18.44 0.23 0.21 0.22 0.26 0.14 0.42 LR Index Sample Number ’ 1979/3-1995/6 period of 1979/3-1995/s 1979/3-1995/4 1979/3-1995/S 196 195 8 9 1979/3-1992/10 1989/3- * 1995/6 164 19s * (2.91) (1.35) 0.10 * (2.13) 1.560 0.033 * * (-2.15) (-0.81) 3.05) 0.087 - - 155.175 (1.38) 0.48) I.271 (- Spain IdY - 1.832 - 0.781 (- (2.62) -0.113 R2 ’ 1.899 2.783 (- * (1.02) (2.50) * Ireland (0.30) 1.91) 0.836 (0.32) E-C a 0.905 (1.43) ( - 2.56) b, log R indicators 8.247 - I.718 log R pressure FtWKe (2.00) i-i speculative Denmark 10 9 zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA 76 5 devaluations a t-ratios are given b The log likelihwd ’ The Likelihood variables have in parentheses. funftion Ratio Index coefficients * and * * denote of a regression (calculated close to zero. statistically with only a constant as [I - (In L)/(ln sigmficant term, coefficients at tbc S percent i.e., with all slope coefficients and 10 percenr assumed levels, respectively. to be ~a*. analogous to the R2 gaodness of fit measure m conventional regression methods; a value close to zero indicates zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA &Jl), that explanatory i. btker, C. Pazarbaglo$u/ European Economic Review 41 (1997) 847- 860 853 1 Fig. 1. One-step ahead probability of a regime change (using speculative pressure indicators): (1) fitted probabilities are computed by using the results of the estimation of the equations in Table 2; and (2) lines indicate fitted probabilities and triangles on the horizontal axis indicate the months in which an actual regime change took place. depreciate within the wider bands, depleting interest rates. their foreign reserves, or by raising 4. zyxwvutsrqponmlkjihgfedcbaZYXWVUTSRQPONMLKJIHGFEDCBA Evaluating the impact of macroeconomic fundamentals This section uses the implications of the monetary model of speculative attacks in order to evaluate the contribution of economic fundamentals to the exchange market pressures identified in the previous section. The model is a stochastic version of the monetary approach to exchange rate determination in the context of 854 i &ker, C. Pazarbayro$u / European Economic Review 41 (1997) 847-860 J zyxwvut 1 Fig. 2. One-step ahead probability of a regime change (using macroeconomic fundamentals): (1) fitted probabilities arc computed by using the results of the estimation of the equations in Table 3; and (2) lines indicate fitted probabilities and triangles on the horizontal axis indicate the months in which an actual regime change took place. a small open economy whose government and monetary authority are committed to maintain the exchange rate within an adjustable peg system. In its simplest form, the speculative attack model underlines a process in which fiscal and financial imbalances lead to an eventual collapse of the fixed exchange rate regime. Under a fixed exchange rate system, the money market equilibrium condition determines the path of foreign reserves of the central bank. The enforcement of the peg depends on the ability of the authorities to control the monetary base. The central bank is posited to be prepared to defend the peg so long as it has a minimum acceptable level of reserves. When reserves reach that critical level - i. &ker, C. Pazarba~lo&/ European Economic Review 41 (1997) 847- 860 855 e.g. because of excessive central bank credit - the exchange rate must adjust. The central bank must then abandon the prevailing parity by either devaluing or floating its currency. The floating rate which would clear the market is referred to as the “shadow exchange rate”, e^. Solving the monetary model for the exchange rate derives the shadow exchange rate as a function of economic fundamentals, including those factors affecting money demand and supply. The model approximates the probability of a regime change by that of a speculative attack, which is assumed to take place when speculators expect the shadow exchange rate in the next period to exceed the actual fixed rate, e 5. The one-step-ahead probability, nt, of a regime change at t + 1 based on information available at t can then be written as a function of the prevailing fixed rate and a set of economic fundamentals, h,, that influence the shadow exchange rate 6: T, = pr(C+,>a,) = ~(h,2,), h,=h(D,,y,,u,,i,*,p:), where D, is the central bank’s domestic credit, yr the real output, i,* and p,* the short-term interest rate and price level of the anchor country, respectively, and U, the real exchange rate. This probability is expected to peak before a regime change materializes. In particular, the probability is expected to rise with an increase in D and i*, and to fall in p * and e. An appreciation of the real exchange rate (which might indicate a loss of competitiveness) is expected to create pressure on the currency. An increase in output signals stronger economic performance, and is expected to be associated with less speculative pressure on the currency. In an attempt to take into account short-run deviations from the full employment level, the unemployment rate, ur, was alternatively used as an explanatory variable. The Probit estimates of the probabilities are presented in Table 3 and the resulting devaluation probabilities are graphed in Fig. 2 over a period dictated by ERM membership or the availability of data on economic fundamentals 7s,9. 5 In the case of the ERM, 2 can be considered as the upper bound of the fluctuation margin for the currency (i.e., the lowest value to which the currency is allowed to fall). ’ For more details on how this specification of the probability of devaluation is obtained, see Blanco and Garber (1986). 7 For example, in the case of Belgium, the model was estimated over the period from March 1979 to February 1993 after which no monthly data was available on money and credit aggregates. ’ Some other variables were also tried: instead of the central bank credit, the government financing need (available for Belgium, France, Italy, and Spain), and instead of the real exchange rate the trade balance. The fiscal variable turned out to have a significant positive coefficient only for France and Spain, while that of the trade balance variable was insignificant for all the countries. 9 F’robit models are known to be sensitive to misspecifications. In particular, estimates may be inconsistent if relevant explanatory variables are excluded, or if the error term is heteroskedastic. Tests for the presence of possible misspecifications indicate that the estimated devaluation probabilities are in general robust except for some evidence of heteroskedasticity in the case of Ireland. 856 1. Otker, C. Pazarbayto$ / European Economic Review 41 (1997) 847-860 i hker, C. Pazarbaglog’lu/ European Economic Review 41 (1997) 847- 860 851 The results provide some support for the view that expansionary credit policies may trigger episodes of speculative pressures. In particular, the expansion of the central bank credit appears to have contributed to pressures on the French franc, and exerts some positive, though statistically insignificant, influence on the probabilities for the Danish krone, the Italian lira, and the Spanish peseta. Results including the deficit variable also suggest that larger budget deficits might have contributed to the pressures on the French franc and the peseta. Moreover, the positive coefficients of the unemployment rate for France and Italy and of the loss of competitiveness for France and Ireland are consistent with explanations that adverse economic conditions can make it costly for the government to defend the fixed exchange rate, and this market perception may trigger speculative pressures and result in an adjustment in the exchange rate (e.g., Obstfeld, 1994). With the exception of France and Denmark, a rise in the German price level has an unexpected positive effect on the probability of devaluation for the other ERM currencies. This may be attributed to the fact that the monetary model takes into account the long-term impact of a rise in the German price level and thus predicts a fall in the probability for other currencies when such rises are perceived by the market as persistent. However, the response of the Bundesbank to higher inflation was in general a tightening of credit policy, and market participants might have perceived the German price shock as temporary and the tightening of monetary policies by the other European countries as more enduring, and their implications for their economies unsustainable against the background of vulnerable fiscal and economic positions lo. The monetary model performs well in explaining the sources of speculative pressures on the lira, peseta, and to some extent the Belgian franc and Irish pound. In many cases the probability peaks at or before an actual devaluation. The model predicts relatively high probabilities for the French franc’s devaluation in 1981 and the widening of the bands in 1993. However, the performance of the monetary model is quite poor for Denmark, for which the observed regime changes can hardly be attributed to any economic fundamental. Nevertheless, the pressures detected within wider bands can be attributed to economic fundamentals for France, Denmark, Ireland, and Spain ‘l. lo Eichengreen and Wyplosz (1993) provide evidence, based on their February 1993 survey of European foreign exchange traders, that high German interest rates and inflation were among the “ very important” factors in making changes in ERM currencies likely. Moreover, 64.7 percent of the survey respondents thought that central bank concerns about the adverse impact of further interest rate hikes on domestic economies were among the “very important” factors in abandoning their efforts to defend certain currencies in the fall 1992 crisis. ‘i In addition to the variables discussed above, the level of foreign exchange reserves was also allowed to influence the probability, an approach followed by several other empirical studies (e.g., Edin and Vredin (1993)). Including foreign reserves improved the performance of the model significantly for Italy and Belgium, giving rise to much higher probabilities for the observed regime changes. 858 I.. Otker, ‘. C. Pazarb~to~lu/European Economic Review 41 (1997) 847-860 5. Sensitivity of the results to alternative sample periods The empirical results presented above are based on data over a sample period that includes the period of wider ( + 15 percent) fluctuation bands 12, It might be argued that the ERM with narrow bands is structurally different from the one with wider bands, since in the latter the pursuit of one-way bets by speculators may require quite substantial attacks to result in a regime collapse. To test the sensitivity of findings to the selection of the sample period, the model was estimated over a period excluding the wider bands. For Denmark, France and Ireland, speculative pressure episodes now seem to be associated with changes in all three pressure indicators, and the probabilities for the observed regime changes seem to be higher for all three currencies. Similarly, monetary model seems to perform better, yielding higher probabilities for the observed regime changes. While these results suggest that the nature of the ERM might have changed after the widening of the bands, the existence of speculative attacks on several currencies detected in the period of wider bands and the devaluation of the peseta in 1995 provide evidence against the view that wider bands can deter speculation. 6. Conciuding remarks This paper attempted to identify the episodes of foreign exchange market pressures on selected ERM currencies and to evaluate the role of macroeconomic fundamentals in generating these episodes of pressures. The empirical results suggest that, for a majority of the sample countries, episodes of speculative pressures and observed regime changes are associated with a deterioration in economic fundamentals. In particular, expansionary credit policies and a widening of government deficits appear to trigger speculative attacks and contribute to an increase in the probability of devaluations. There is also evidence that episodes of pressure may arise - and in some cases may result in an actual regime change when deterioration in economic conditions make it very costly for the government to maintain the existing parities. The monetary model used to evaluate the systematic relationship between the observed regime changes and economic fundamentals does not perform equally well in predicting the actual regime changes for all the sample countries. A relatively small portion of the speculative pressures detected by the pressure indicators can be attributed to the deterioration in economic fundamentals in the case of Denmark and, to some extent, France. This result may provide support for ” Exceptions are Italy, which left tbe ERM prior to the shift to wider bands, and Belgium, for which available data for some of the economic variables cover only the narrow bands period. i. dtker, C. Pazarba~ro~lu/European Economic Review 41 (1997) 847- 860 859 the view that consistent fundamentals are necessary but not sufficient to ensure the maintenance of stable exchange rates. It might also imply, however, that the observed regime changes in these countries were triggered by other factors not captured by the monetary model. Acknowledgements The authors wish to thank Charles Enoch, Manuel Guitian, Michel Robe, Orlando Roncesvalles, George Tavlas, and Michael Wattleworth for their helpful comments and suggestions for an earlier version of this paper, which was issued as an International Monetary Fund Working Paper (WP/94/21). The views expressed in this paper are those of the authors and do not necessarily represent those of the International Monetary Fund. All remaining errors belong to the authors. Appendix A. Description E: Level of the end-of-period spot exchange rate. In case of Belgium, Denmark, France, Italy, and Spain, it is the price of the deutsche mark in terms of the Danish krone and the Spanish peseta. In case of Ireland, it is the price of the Irish pound in terms of the mark. Source: IFS, International Monetary Fund. Level of the bilateral central parity for the Belgian franc, the Danish krone, the French franc, the Irish pound, the Italian lira, and the Spanish peseta vis-‘a-vis the deutsche mark. Sources: Ungerer et al. (1990), and Foreign Exchange Outlook by the Vefa Group. Short-term domestic money market rates. Source: IFS (line 60b), International Monetary Fund. Short-term money market rate for Germany. Source: IFS (lines 60b or 6Obs), International Monetary Fund. Central bank total reserves minus gold (in domestic currency converted at end-of-period spot exchange rate). Source: IFS (line 11 .d), Intemational Monetary Fund. Net domestic credit extended by the central bank. Source: IFS (lines 12a + 12d + 12e + 12e + 12f- 16d), International Monetary Fund. Unemployment rate as percent of labor force. Sources: IMF Surveillance Data Base, OECD-Main Economic Indicators, the Danish Statistical Bureau, European Commission, and authors interpolations from quarterly data for those period when monthly data do not exist. Log of the real effective exchange rate index based on relative consumer prices. Source: IFS (line ret), International Monetary Fund. C: i: ‘*. 1 . R: D: ur: U. and sources of the data . 860 I. Otker, C. Pazarbagro$u / European Economic Review 41 (1997) 847-860 p*: Log of the German consumer price index. Source: IFS (line 64), International Monetary Fund. Central government deficit. Sources: IFS (line 80) for Belgium and Spain; National Bank of Belgium Bulletin; IFS (line 84) for France; the Bank of Italy, and authors’ interpolations from quarterly data for those period when monthly data do not exist. Trade balance or net exports (in domestic currency). Source: IFS (line 70-line 7 l>, International Monetary Fund. Def: X-M: References Agenor, P.R., J.S. Bhandari and R.P. Flood, 1992, Speculative attacks and models of balance of payments crises, International Monetary Fund, Staff papers 39, no. 2, 357-394. Blackbum, K. and M. Sola, 1993, Speculative currency attacks and balance of payments crises, Journal of Economic Surveys 7, no. 2, 119-144. Blanco, H. and P.M. Garber, 1986, Recurrent devaluation and speculative attacks on the Mexican peso, Journal of Political Economy 94, Feb., 148-166. Cumby, R.E. and S. van Wijnbergen, 1989, Financial policy and speculative runs with a crawling peg: Argentina 1979-1981, Journal of International Economics 27, Aug., 111-127. Edin, P.A. and A. Vredin, 1993, Devaluation risk in target zones: Evidence from the Nordic countries, The Economic Journal, no. 103, Jan., 161-175. 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