On Nash Equilibria in Speculative Attack Models

Since a fixed exchange rate regime is a fixed price system, there is no theoretical reason to presume that the foreign exchange market clears, particularly during a speculative attack. This paper shows that equilibria where we allow for the possibility of such corner solutions are a superset of the previously examined “market-clearing” equilibria. The timing of the balance-of-payments crisis is no longer predictable in the same sense – multiple equilibria exist even in the very simplest speculative attack model.