The Relevance of Currency Speculation in Today's Financial System – A Macroeconomic Analysis

This thesis examines the determinants of speculative attacks using the case study of Black Wednesday (1992), when the British pound was forced out of the European Exchange Rate Mechanism (ERM). The analysis is based on macroeconomic models for open economies, specifically the frameworks developed by Krugman, Obstfeld, and the Mundell-Fleming model. These models serve as fundamental tools for understanding currency crises and allow for a structured assessment of the factors that contributed to the pound’s collapse. By applying these theoretical models, key indicators that favor such speculative attacks are identified. The study then extends this analysis to contemporary fixed or pegged exchange rate regimes, drawing parallels between Black Wednesday and current vulnerabilities in the global financial system. Furthermore, the thesis discusses the likelihood of similar speculative attacks occurring in the future and evaluates potential measures that central banks could adopt to mitigate such risks. The findings highlight the ongoing relevance of speculative dynamics in currency markets and underscore the importance of sound monetary policies in defending exchange rate regimes. This research contributes to the broader discussion on financial stability, speculative behavior, and the role of central banks in managing exchange rate crises.