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

  • Benedikt Goderis
  • Vasso P. Ioannidou

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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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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