SPECULATIVE CURRENCY ATTACKS WITH ENDOGENOUSLY INDUCED COMMERCIAL BANK CRISES

To date, all models of exchange rate crises ignore the existence of a commercial banking sector. However, if deposit money (internal drain) is used to purchase foreign exchange (external drain), then an externa l drain may give rise to a banking crisis. The paper illustrates how a n internal drain alters the dynamics of a speculative attack when it r esults in a cash payments restriction: by interrupting the external dr ain, such a restriction postpones devaluation and reduces the size of the initial devaluation. The US internal and external drains of 1893 a re discussed to provide motivation and support for the model. (JEL F3, G2). Copyright (C) 1996 Elsevier Science Ltd