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Currency Crises and Monetary Policy: A Study on Advanced and Emerging Economies

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  • Eijffinger, Sylvester C W
  • Karatas, Bilge

Abstract

Currency crisis literature offers a broad area of research regarding the causes and impacts of the phenomenon. The literature recently focuses on the appropriate policy measures in the aftermath of a currency crisis; however the studies do not gather around a robust answer regarding the appropriate monetary policy response in defending the domestic currency. This study tries to emphasize the notion that there is no single policy applicable for all currency crises happened and happening in the global world. The approach of the study is presenting empirical evidence by focusing separately on the advanced and emerging economies and proving that the monetary policy response for the emerging economies should be different from the advanced economies, depending mainly on the vulnerabilities of these economies preceding and during the crisis periods. The study includes twenty four economies, in which fifteen of them are emerging and nine of them are advanced, for the crisis periods between 1986 and 2009. The main finding of the study is that the tight monetary policy is effective in the advanced economies and detrimental in the emerging economies. Advanced economies besides having more independent central banking, lower country riskiness and almost no default history; mainly have second generation model weaknesses which cause the increased interest rates to be successful in stabilizing the exchange rates. For the emerging economies the third generation models play a major role together with the first generation models’ vulnerabilities. Thus the major policy implication follows that the policy makers should take into account the economic fragilities during the crisis in defending the currency.

Suggested Citation

  • Eijffinger, Sylvester C W & Karatas, Bilge, 2010. "Currency Crises and Monetary Policy: A Study on Advanced and Emerging Economies," CEPR Discussion Papers 7798, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:7798
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    Cited by:

    1. Karatas, B., 2014. "Financial crisis and monetary policy," Other publications TiSEM 41e463f0-e122-4379-8db5-6, Tilburg University, School of Economics and Management.
    2. Farshid Pourshahabi & Nazar Dahmardeh, 2015. "Economic Sanctions, Speculative Attacks and Currency Crisis," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 5(2), pages 340-355, February.
    3. Ryota Nakatani, 2014. "The Effects of Financial and Real Shocks, Structural Vulnerability and Monetary Policy on Exchange Rates from the Perspective of Currency Crises Models," UTokyo Price Project Working Paper Series 043, University of Tokyo, Graduate School of Economics.
    4. Teimouri, Sheida & Zietz, Joachim, 2017. "Economic costs of alternative monetary policy responses to speculative currency attacks," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 419-434.
    5. repec:mes:emfitr:v:53:y:2017:i:11:p:2545-2561 is not listed on IDEAS
    6. Ryota Nakatani, 2016. "Twin Banking and Currency Crises and Monetary Policy," Open Economies Review, Springer, vol. 27(4), pages 747-767, September.
    7. Eijffinger, Sylvester C W & Karatas, Bilge, 2013. "Three Sisters: The Interlinkage between Sovereign Debt, Currency and Banking Crises," CEPR Discussion Papers 9369, C.E.P.R. Discussion Papers.
    8. Fedorova, E. & Mukhin, A. & Dovzhenko, S., 2016. "Modeling Rules of Monetary Policy of the Central Bank of the Russian Federation with the Financial Stress Index," Journal of the New Economic Association, New Economic Association, vol. 29(1), pages 84-105.

    More about this item

    Keywords

    Currency crises; Interest Rate Defense; Monetary Policy;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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