The politics of speculative attacks in industrial democracies

Recent models of speculative currency crises contend that market expectatio ns of policy behavior can trigger a speculative attack. We argue that polit ical processes and partisan objectives inform expectations about the govern ment's commitment to the exchange rate. First, market actors anticipate per iods when the partisan identity of a government may change through an elect ion or a cabinet collapse. Second, party labels provide information to curr ency traders about the policy objectives of a potential government. Consequ ently, we contend that the probability of a speculative attack will be high er when markets expect the cabinet to end and when the cabinet dissolution is likely to produce a leftward shift in policy. A discrete time-survival m odel is used to estimate the probability that a cabinet will dissolve in an y given month for sixteen parliamentary democracies from 1970 to 1995. The predicted values are then used as a proxy for market expectations in a mode l of speculative currency crises.