A Model of Speculative Attacks and Devaluations in Korea and Indonesia

Abstract

Since the beginning of the Bretton Woods era, currency crises and speculative attacks have affected the world economy. This paper presents a model, originally derived by Blanco and Garber, that predicts one-period ahead probabilities of a currency devaluation and the expected exchange rate conditional on a devaluation. The analysis is then applied to Korea and Indonesia during the periods of 1960-1980 and 1969-1989, respectively. Despite numerous devaluations during both periods, all of the calculated probabilities of devaluation in the next period are close to zero for both Korea and Indonesia. However, it is promising that rises in predicted probabilities of devaluation are observed before actual devaluations for Indonesia.