Can foreign currency deposits prop up a collapsing exchange-rate regime?

The Flood and Garber [Flood, R.P., Garber, P.M., 1984. Collapsing exchange-rate regimes: some linear examples. Journal of International Economics 17, 1-13] speculative attack model is extended to consider whether the authorities could forestall an exchange rate collapse by encouraging foreign currency holdings by domestic residents. Deposits of foreign currency could be held at home or abroad, although domestic residents have a home country preference other things equal. The paper considers the consequences of a required reserves policy on domestically located deposits, which the authorities use to supplement official reserves to defend the exchange rate. Despite initial findings that suggest the life of the regime can be lengthened in this way the paper shows that such a policy does not postpone a collapse but actually hastens it. (C) 1999 Elsevier Science B.V. All rights reserved.