Was the French Franc Crisis a Sunspot Equilibrium?
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This paper examines the extent to which speculation against the French franc in 1992-93 was
motivated by the fundamentals or resulted from a sunspot phenomenon. We develop a model
of currency crises which encompasses both hypotheses about the origin of speculation. The
estimation shows that the model with sunspots not only better tracks the episodes of
speculation, but also gives a better account of the relationship between the fundamentals and
the devaluation expectations.