COLLAPSING EXCHANGE-RATE REGIMES - ANOTHER LINEAR EXAMPLE

in the literature on speculative attacks on a fixed exchange rate it i s usually assumed that the monetary authority responsible for fixing t he rate reacts passively to the monetary disruption caused by the atta ck. This assumption is grossly at odds with actual experience where th e monetary base implications of the attacks are usually sterilized. Su ch sterilization means that the attack is no longer exclusively a mone tary event and requires that the standard attack model be broadened to include the effects of sterilization on other markets. These issues a re motivated by reference to the December 1994 collapse of the Mexican peso.