Speculative attacks, Private Signals and Intertemporal Trade-offs

Confronted with a speculative attack on its currency peg, an authority weighs the short-term benefit of giving in and fine tuning the economy against the long-term benefit of credibility-enhancing resistance. In turn, speculators with heterogeneous beliefs face strategic uncertainty that peaks at the time of the attack, when the fate of the peg is unclear, and then declines, as the economy settles in a stable currency regime. In this environment, a less conservative authority - i.e. one that stabilises less...