This paper analyzes Krugman's contention that there is a "gold standard
paradox" in the speculative attack literature. The paradox occurs if a
country's currency appreciates after it runs out of gold or equivalently if a
speculative attack can happen only after the country "naturally" runs out of
reserves. We first show that Krugman's paradox is a very general phenomenon
which does not require mean reverting processes for the fundamentals and
which can be present in discrete time models as well as in continuous time
models. We present several specific cases in which the paradox occurs i.e.
environments which do not support an equilibrium. Next we show that,
contrary to Krugman's conjecture, it is not necessary to abandon the
assumption of a perfectly fixed exchange rate in favor of a band system in
order to recover a well-defined equilibrium. We propose two alternative ways
of amending the model which produce an equilibrium and preserve the fixed
exchange rate assumption.
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