A currency crisis model with a misaligned central parity: a stochastic analysis

The currency crisis model outlined in this paper assumes state-contingent r eserve dynamics which depend on the deviations of the exchange rate from a misaligned central parity. The size of the misalignment is affected by an u nderlined fundamental which embodies money aggregates and a stochastic shoc k. The main result, in the presence of an irreversible switch of regime, is that the size of the attack is amplified by the feedback effect from the c omposite fundamental to the exchange rate. (C) 2000 Elsevier Science S.A. A ll rights reserved.