Speculative Attacks on Nordic Exchange-Rates, 1971-1992

Abstract

This paper analyzes the relationship between economic fundamentals and balance-ofpayments crises for the three Nordic countries, Norway, Sweden, and Finland, during 1971- 1992. To identify periods of balance-of-payments crisis a method first introduced by Eichengreen, Rose, and Wyplosz (1996) was used. They did not report specific results for the three Nordic countries, but compared a group of ERM countries with a control-group of non- ERM countries (including Norway, Sweden and Finland) during 1967-1992. The results here verify theirs more generally, in that the three Nordic non-ERM countries in particular also followed the so-called first-generation of balance-of-payments-crisis models (Paul Krugman, 1979). A second finding was that balance-of-payments crises for the three Nordic countries mainly took place during recessions, typically when governments tried to stimulate their way out by holding government spending constant in spite of decreased tax revenues, which led to budget deficits and speculative attacks. This result is consistent with Krugman’s firstgeneration model, based on constant revenue and increased spending, which led to the same result.