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Does Monetary Policy Stabilize the Exchange Rate Following a Currency Crisis?

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  • Ilan Goldfajn

    (International Monetary Fund)

  • Poonam Gupta

    (International Monetary Fund)

Abstract

This paper provides evidence on the relationship between monetary policy and the exchange rate in the aftermath of currency crises. It analyzes a large dataset of currency crises in 80 countries for the period 1980-98. The main question addressed is whether monetary policy can increase the probability of reversing a postcrisis undervaluation through nominal appreciation rather than higher inflation. We find that tight monetary policy facilitates the reversal of currency undervaluation through nominal appreciation. When the economy also faces a banking crisis, the results are not robust and depend on the specification. Copyright 2003, International Monetary Fund

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal IMF Staff Papers.

Volume (Year): 50 (2003)
Issue (Month): 1 ()
Pages: 5

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Handle: RePEc:pal:imfstp:v:50:y:2003:i:1:p:5

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  1. Barry Eichengreen & Andrew K. Rose & Charles Wyplosz, 1995. "Speculative attacks on pegged exchange rates: an empirical exploration with special reference to the European Monetary System," Working Papers in Applied Economic Theory 95-04, Federal Reserve Bank of San Francisco.
  2. Paul R. Masson & Allan Drazen, 1994. "Credibility of Policies Versus Credibility of Policymakers," IMF Working Papers 94/49, International Monetary Fund.
  3. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
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