Currency Crises and Monetary Policy in Economies with Partial Dollarization of Liabilities
AbstractAfter the breakdown of aggregate investment observed after the 1997-98 East Asian crisis, in almost all countries which suffered from sharp nominal devaluations, academicians and policymakers have engaged in a hot debate about the adequate monetary policy strategy against a speculative attack on the domestic currency. By means of a simple currency crisis model based on Proa~no, Flaschel and Semmler (2005), this paper shows how an increase in the domestic interest rate by the central bank, as a response to a currency run on the domestic currency, can significantly affect the aggregate demand by depressing the investment of the subsector of domestic firms which are not indebted in foreign currency. Furthermore, it is shown that, in specific scenarios, the strategy adopted by the East Asian countries of domestic interest rate increases might not have been the best response to a speculative attack from the medium term point of view.
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Bibliographic InfoArticle provided by IUP Publications in its journal The IUP Journal of Monetary Economics.
Volume (Year): VI (2008)
Issue (Month): 3 (August)
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Other versions of this item:
- Peter Flaschel & Christian Proano & Willi Semmler, 2006. "Currency Crises and Monetary Policy in Economies with Partial Dollarisation of Liabilities," IMK Working Paper 05-2006, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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