ABSTRACT
In this chapter we overview the speculative attack and currency crises literatures. The speculative attack models were originally developed to provide an understanding of currency crisis in Latin America and, in particular, the failure of stabilisation plans in the 1970s and 1980s. The so-called first generation models of Krugman (1979) and Flood and Garber (1984) had at their core the relationship between a fixed exchange rate and inconsistent economic fundamentals, namely, monetary and fiscal policy. In particular, this class of model was designed to show how a combination of fixed exchange rates and excessive money supply growth prior to an attack could push an economy into crises, with the private sector trying to profit from unravelling what they see as inconsistent policies. An alternative perspective on this class of models is to say they demonstrate that currency crises associated with the stabilisation policies pursued in Latin America in the 1970s and 1980s were not a sign of market malfunction, but rather they are the consequence of an inappropriate fiscal–monetary mix pursued by these countries (Jeanne 2000a). A classic application of the first generation model has been to the devaluation of the Mexican peso in 1976 and 1981 (see Blanco and Garber 1986).
