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Currency crashes and bond yields in industrial countries

  • Joseph E. Gagnon

This paper examines episodes of sudden large exchange rate depreciations (currency crashes) in industrial countries and characterizes the behavior of government bond yields during and after these crashes. The most important determinant of changes in bond yields appears to be inflationary expectations. When inflation is high and rising at the time of a currency crash, bond yields tend to rise. Otherwise--and in every currency crash since 1985--bond yields tend to fall. Over the past 20 years, inflation rates have been remarkably stable in industrial countries after currency crashes.

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File URL: http://www.federalreserve.gov/pubs/ifdp/2005/837/default.htm
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File URL: http://www.federalreserve.gov/pubs/ifdp/2005/837/ifdp837.pdf
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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 837.

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Date of creation: 2005
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Handle: RePEc:fip:fedgif:837
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  1. Obstfeld, Maurice & Rogoff, Kenneth S, 2005. "The Unsustainable US Current Account Position Revisited," Center for International and Development Economics Research, Working Paper Series qt4f63x50j, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  2. Gian-Maria Milesi-Ferretti & Assaf Razin, 1998. "Current Account Reversals and Currency Crisis; Empirical Regularities," IMF Working Papers 98/89, International Monetary Fund.
  3. Neil R. Ericsson & James G. MacKinnon, 2002. "Distributions of error correction tests for cointegration," Econometrics Journal, Royal Economic Society, vol. 5(2), pages 285-318, 06.
  4. Andrew Berg & Eduardo Borensztein & Catherine A. Pattillo, 2004. "Assessing Early Warning Systems; How Have they Worked in Practice?," IMF Working Papers 04/52, International Monetary Fund.
  5. Tudela, Merxe, 2004. "Explaining currency crises: a duration model approach," Journal of International Money and Finance, Elsevier, vol. 23(5), pages 799-816, September.
  6. Joseph E. Gagnon, 2008. "Inflation regimes and inflation expectations," Review, Federal Reserve Bank of St. Louis, issue May, pages 229-243.
  7. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers 534, Board of Governors of the Federal Reserve System (U.S.).
  8. Jane E. Ihrig & Mario Marazzi & Alexander D. Rothenberg, 2006. "Exchange-rate pass-through in the G-7 countries," International Finance Discussion Papers 851, Board of Governors of the Federal Reserve System (U.S.).
  9. Hilary Croke & Steven B. Kamin & Sylvain Leduc, 2005. "Financial market developments and economic activity during current account adjustments in industrial economies," International Finance Discussion Papers 827, Board of Governors of the Federal Reserve System (U.S.).
  10. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July.
  11. Kent Osband & Caroline Van Rijckeghem, 2000. "Safety from Currency Crashes," IMF Staff Papers, Palgrave Macmillan, vol. 47(2), pages 4.
  12. Pinelopi K. Goldberg & Michael M. Knetter, 1996. "Goods Prices and Exchange Rates: What Have We Learned?," NBER Working Papers 5862, National Bureau of Economic Research, Inc.
  13. Engel, Charles & Rogers, John H. & Rose, Andrew K., 2003. "Empirical exchange rate models," Journal of International Economics, Elsevier, vol. 60(1), pages 1-2, May.
  14. Phillips, Peter C B & Loretan, Mico, 1991. "Estimating Long-run Economic Equilibria," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 407-36, May.
  15. Joseph E. Gagnon & Jane Ihrig, 2001. "Monetary policy and exchange rate pass-through," International Finance Discussion Papers 704, Board of Governors of the Federal Reserve System (U.S.).
  16. Joseph E. Gagnon & Jane Ihrig, 2004. "Monetary policy and exchange rate pass-through This article is a U.S. Government work and is in the public domain in the U.S.A," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(4), pages 315-338.
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