DOMESTIC BANK RUNS AND SPECULATIVE ATTACKS ON FOREIGN CURRENCIES

The paper extends the international-transmission-of-financial-crisis l iterature by illustrating how a domestic bank run can cause a speculat ive attack on foreign currencies. The idea is that when domestic banks invest abroad, a domestic bank run will give way to a repatriation of foreign capital. If the repatriation causes a depletion of the foreig n central bank's foreign exchange reserves, then the foreign currency will be devalued. As such a devaluation will render domestic banks ins olvent, in the rational equilibrium, domestic bank runs will (1) cause a speculative attack on the foreign currency and (2) be self-justifie d. (C) 1998 Elsevier Science B.V. All rights reserved.