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A Model of Speculative Attacks and Devaluations in Korea and Indonesia

By Austin Li

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.

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Advisor: Kent Kimbrough

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