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Monetary policy during speculative attacks: Are there adverse medium term effects?

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  • Bergman, U. Michael
  • Jellingsø, Mads
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    Abstract

    This paper extends the currency crises model of Aghion, Bacchetta and Banerjee (2000, 2001, 2004) in different directions. Our main result is that a tight monetary policy can have adverse effects beyond the short term and can potentially cause a currency crisis in the medium term, even in cases when the interest rate defense is successful and prevented a currency crisis in the short-run. In addition, we add a risk premium and find that this increases the likelihood of a crisis, can help explain contagion, and that prospective capital controls will increase the likelihood that such controls will be needed as an emergency measure.

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    Bibliographic Info

    Article provided by Elsevier in its journal The North American Journal of Economics and Finance.

    Volume (Year): 21 (2010)
    Issue (Month): 1 (March)
    Pages: 5-18

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    Handle: RePEc:eee:ecofin:v:21:y:2010:i:1:p:5-18

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    Web page: http://www.elsevier.com/locate/inca/620163

    Related research

    Keywords: Speculative attacks Foreign-currency debt Balance sheets Interest parity Risk premium Contagion Prospective capital control Monetary policy;

    References

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