Overshootings and Reversals: The Role of Monetary Policy
AbstractThis paper provides evidence on the relationship between monetary policy and the exchange rate in the aftermath of currency crises taking into account the role of a fragile banking system. It analyzes a large set of currency crises that led to real exchange rate undervaluations from a sample of 80 countries in the period 1980 to 1998. First, the paper evaluates whether tight monetary policy increases substantially the probability of reversing the undervaluation through nominal appreciation of the exchange rate rather than through higher inflation. Second, using panel data, the paper estimates the relationship between real exchange rates and real interest rates. We find that tight monetary policy facilitates the reversal of the real exchange rate through nominal appreciation rather than inflation. In contrast, when the economy is also facing a banking crisis, tight monetary policy may not have the same effect.
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Bibliographic InfoPaper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 126.
Date of creation: Nov 2001
Date of revision:
Other versions of this item:
- Ilan Goldfajn & Poonam Gupta, 2002. "Overshootings and Reversals: The Role of Monetary Policy," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (S (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 9, pages 279-302 Central Bank of Chile.
- NEP-ALL-2004-02-10 (All new papers)
- NEP-CBA-2002-02-15 (Central Banking)
- NEP-IFN-2002-02-15 (International Finance)
- NEP-MON-2002-02-15 (Monetary Economics)
- NEP-PKE-2002-02-15 (Post Keynesian Economics)
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