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Currency crashes and bond yields in industrial countries

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Author Info
Gagnon, Joseph E.

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Abstract

This paper examines episodes of sudden large exchange rate depreciations (currency crashes) in industrial countries and characterizes the behavior of government bond yields during and after these crashes. The most important determinant of changes in bond yields appears to be inflationary expectations. When inflation is high and rising at the time of a currency crash, bond yields tend to rise. Otherwise--and in every currency crash since 1985--bond yields tend to fall. Over the past 20 years, inflation rates have been remarkably stable in industrial countries after currency crashes.

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Publisher Info
Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 28 (2009)
Issue (Month): 1 (February)
Pages: 161-181
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Handle: RePEc:eee:jimfin:v:28:y:2009:i:1:p:161-181

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Web page: http://www.elsevier.com/locate/inca/30443

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Related research
Keywords: Exchange rate Depreciation Interest rate Inflation;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Maurice Obstfeld & Kenneth Rogoff, 2004. "The Unsustainable US Current Account Position Revisited," NBER Working Papers 10869, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Eduardo Borensztein & Catherine A. Pattillo & Andrew Berg, 2004. "Assessing Early Warning Systems: How Have They Worked in Practice?," IMF Working Papers 04/52, International Monetary Fund. [Downloadable!]
  3. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November. [Downloadable!] (restricted)
    Other versions:
  4. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July. [Downloadable!] (restricted)
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  5. Gian Maria Milesi-Ferrett & Assaf Razin, 1998. "Current Account Reversals and Currency Crises: Empirical Regularities," NBER Working Papers 6620, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Engel, Charles & Rogers, John H. & Rose, Andrew K., 2003. "Empirical exchange rate models," Journal of International Economics, Elsevier, vol. 60(1), pages 1-2, May. [Downloadable!] (restricted)
  7. Phillips, Peter C B & Loretan, Mico, 1991. "Estimating Long-run Economic Equilibria," Review of Economic Studies, Blackwell Publishing, vol. 58(3), pages 407-36, May. [Downloadable!] (restricted)
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  8. Neil R. Ericsson & James G. MacKinnon, 2002. "Distributions of error correction tests for cointegration," Econometrics Journal, Royal Economic Society, vol. 5(2), pages 285-318, 06. [Downloadable!] (restricted)
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  9. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September. [Downloadable!] (restricted)
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  10. Tudela, Merxe, 2004. "Explaining currency crises: a duration model approach," Journal of International Money and Finance, Elsevier, vol. 23(5), pages 799-816, September. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sebastian Edwards, 2005. "The End of Large Current Account Deficits, 1970-2002: Are There Lessons for the United States?," NBER Working Papers 11669, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Carol C. Bertaut & Steven B. Kamin & Charles P. Thomas, 2008. "How long can the unsustainable U.S. current account deficit be sustained?," International Finance Discussion Papers 935, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  3. Barry Eichengreen, 2007. "Insurance Underwriter or Financial Development Fund: What Role for Reserve Pooling in Latin America?," Open Economies Review, Springer, vol. 18(1), pages 27-52, February. [Downloadable!] (restricted)
    Other versions:
  4. Arnaud Mehl & Lorenzo Cappiello, 2007. "Uncovered interest oparity at distant horizons - evidence on emerging economies & nonlinearities," Working Paper Series 801, European Central Bank. [Downloadable!]
  5. Barry Eichengreen, 2005. "Commentary : the end of large current account deficits : 1970-2002 : are there lessons for the United States?," Proceedings, Federal Reserve Bank of Kansas City, issue Aug, pages 269-276. [Downloadable!]
  6. Francis E. Warnock, 2006. "How Might a Disorderly Resolution of Global Imbalances Affect Global Wealth?," IMF Working Papers 06/170, International Monetary Fund. [Downloadable!]
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