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Currency Crises and Macroeconomic Performance

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Author Info
Luke Gower (Reserve Bank of Australia)
Alan Krause (Reserve Bank of Australia)
Abstract

This paper presents some theory and evidence on the implications of sudden currency depreciations for output and inflation. It identifies some of the characteristics shared by countries which have suffered falling output in the aftermath of a currency crisis, and it presents a small model which rationalises aspects of this common experience. The model is then used to derive the optimal monetary policy response to a crisis. A key result is that a currency crisis which coincides with a banking crisis is more likely to depress output and may call for an accommodating monetary policy.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2002-08.

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Date of creation: Nov 2002
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Handle: RePEc:rba:rbardp:rdp2002-08

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Related research
Keywords: currency crises monetary policy

Find related papers by JEL classification:
E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
F3 - International Economics - - International Finance

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References listed on IDEAS
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  1. Buiter, Willem H. & Miller, Marcus, 1982. "Real exchange rate overshooting and the output cost of bringing down inflation," European Economic Review, Elsevier, vol. 18(1), pages 85-123. [Downloadable!] (restricted)
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  2. Panizza, U. & Stein, E.H. & Hausmann, R., 2000. "Why Do Countries Float the Way They Float?," RES Working Papers 418, Inter-American Development Bank, Research Department.
    Other versions:
  3. Ilan Goldfajn & Poonam Gupta, 1999. "Does Monetary Policy Stabilize the Exchange Rate Following a Currency Crisis?," IMF Working Papers 99/42, International Monetary Fund.
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  4. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2000. "A simple model of monetary policy and currency crises," European Economic Review, Elsevier, vol. 44(4-6), pages 728-738, May. [Downloadable!] (restricted)
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  5. Panizza, U. & Stein, E.H. & Hausmann, R., 2000. "Why Do Countries Float the Way They Float?," RES Working Papers 418, Inter-American Development Bank, Research Department.
  6. Kraay, Aart, 2000. "Do high interest rates defend currencies during speculative attacks ?," Policy Research Working Paper Series 2267, The World Bank. [Downloadable!]
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  7. Jason Furman & Joseph E. Stiglitz, 1998. "Economic Crises: Evidence and Insights from East Asia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1998-2), pages 1-136. [Downloadable!]
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