Currency Crises and Monetary Policy in Economies with Partial Dollarisation of Liabilities
AbstractThe right response to a speculative attack on the domestic currency by monetary authorities in a country with liabilities in US dollars has been a matter of hot debate among academics and policy makers especially after the East Asian Crisis. Using a modified version of the currency crisis model discussed in Proano, Flaschel and Semmler (2005) the authors show that an increase of the domestic interest rate by the central bank as a response to the speculative attack can have serious negative effects on aggregate demand by depressing the investment activity of those domestic firms which are not indebted in foreign currency. The authors demonstrate that in specific situations the standard (IMF supported) increase of the domestic interest rate might not be the best response to a speculative attack on the domestic currency from a medium term point of view.
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Bibliographic InfoPaper provided by IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute in its series IMK Working Paper with number 05-2006.
Length: 36 pages
Date of creation: Jun 2006
Date of revision:
Mundell-Fleming-Tobin model; liability dollarisation; debt-financed investment; financial crisis; currency crisis; deflation.;
Other versions of this item:
- Christian Proa~no & Peter Flaschel & Willi Semmler, 2008. "Currency Crises and Monetary Policy in Economies with Partial Dollarization of Liabilities," The IUP Journal of Monetary Economics, IUP Publications, vol. 0(3), pages 14-39, August.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-02-17 (All new papers)
- NEP-CBA-2007-02-17 (Central Banking)
- NEP-IFN-2007-02-17 (International Finance)
- NEP-MAC-2007-02-17 (Macroeconomics)
- NEP-MON-2007-02-17 (Monetary Economics)
- NEP-SEA-2007-02-17 (South East Asia)
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