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Understanding Currency Crises and Monetary Policy Responses in Emerging Economies

In: Exchange Rates, Currency Crisis and Monetary Cooperation in Asia

Author

Listed:
  • Makarand Parulkar

Abstract

When analyzing the appropriate monetary policy response during a currency crisis, it is important to keep in mind two distinct channels: (a) the impact of changing interest rates on exchange rates; and (b) the direct impact of exchange rate changes on output. The first pertains to the monetary side of the economy as given by the interest parity condition, while the second deals with the real side of the economy. The interaction between these two legs of the economy derives the equilibrium output and exchange rate changes in the economy. Thus, the net effect of monetary policy on output and exchange rate requires consideration of both dimensions of the economy.

Suggested Citation

  • Makarand Parulkar, 2009. "Understanding Currency Crises and Monetary Policy Responses in Emerging Economies," Palgrave Macmillan Books, in: Ramkishen S. Rajan (ed.), Exchange Rates, Currency Crisis and Monetary Cooperation in Asia, chapter 6, pages 134-150, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-23419-2_6
    DOI: 10.1057/9780230234192_6
    as

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