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Do High Interest Rates Defend Currencies During Speculative Attacks? New evidence

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  • Benedikt Goderis
  • Vasso P. Ioannidou

Abstract

A recent paper by Kraay (2003) documents the lack of any systematic association between monetary policy and the outcome of a speculative attack. This paper extends Kraay’s work by introducing an improved measure of monetary policy and an additional country-specific fundamental, short-term corporate debt, to capture balance sheet vulnerabilities emphasized by the recent currency crises literature. The results show that for low levels of short-term corporate debt, raising interest rates lowers the probability of a successful attack. This effect decreases and eventually reverses for higher levels of debt. These findings contrast earlier empirical evidence and imply a fundamental reconsideration of the role of monetary policy during currency crises.

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File URL: http://www.csae.ox.ac.uk/workingpapers/pdfs/2006-11text.pdf
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Bibliographic Info

Paper provided by Centre for the Study of African Economies, University of Oxford in its series CSAE Working Paper Series with number 2006-11.

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Date of creation: 2006
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Handle: RePEc:csa:wpaper:2006-11

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Keywords: speculative attacks; currency crises; monetary policy; short-term debt;

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References

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  1. Lestano & Jan Jacobs & Gerard H. Kuper, 2004. "Indicators of financial crises do work! An early-warning system for six Asian countries," International Finance 0409004, EconWPA.
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