Speculative currency attacks with endogenously induced commercial bank crises

To date, all models of exchange rate crises ignore the existence of a commercial banking sector. However, if deposit money (internal drain) is used to purchase foreign exchange (external drain), then an external drain may give rise to a banking crisis. The paper illustrates how an internal drain alters the dynamics of a speculative attack when it results in a cash payments restriction: by interrupting the external drain, such a restriction postpones devaluation and reduces the size of the initial devaluation. The US internal and external drains of 1893 are discussed to provide motivation and support for the model. (JEL F3, G2). Copyright (C) 1996 Elsevier Science Ltd