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Do high interest rates defend currencies during speculative attacks New evidence

  • Goderis, Benedikt
  • Ioannidou, Vasso P.

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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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 74 (2008)
Issue (Month): 1 (January)
Pages: 158-169

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Handle: RePEc:eee:inecon:v:74:y:2008:i:1:p:158-169
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  1. Flood, Robert P & Jeanne, Olivier, 2000. "An Interest Rate Defence of a Fixed Exchange Rate?," CEPR Discussion Papers 2507, C.E.P.R. Discussion Papers.
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  18. Goderis, Benedikt & Ioannidou, Vasso P., 2008. "Do high interest rates defend currencies during speculative attacks New evidence," Journal of International Economics, Elsevier, vol. 74(1), pages 158-169, January.
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