Currency attacks, information externalities and search Available to Purchase

The currency crisis literature now comprises three main schools of thought; first‐generation models consider the depletion of foreign exchange reserves as a consequence of incompatible exchange rate and monetary policies. Second‐generation models are based on speculative theories whereby the belief of investors that monetary policy will be modified as a result of an attack makes the attack possible. Third‐generation models have been designed in an attempt to explain the nature of the Asian crises of 1997/1998. Each school of thought considers the nature of a speculative attack. However, this model uses a search framework to explain the timing of an attack in terms of an information externality in the foreign exchange market. It then assesses the efficacy of a Tobin tax in delaying and thereby possibly preventing such a crisis.