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Do high interest rates stem capital outflows?

  • Michael R. Pakko

Conventional wisdom posits that high interest rates stem capital flight and currency depreciation. Some have argued, however that the standard prescription exacerbates the problems. This paper set out a framework for evaluating the conditions under which an increase in domestic interest rates fails to reverse capital outflow. The possibility that high domestic interest rates might have unorthodox effects arises through a risk premium: If raising interest rates increases the possibility associated with default, the result can be a worsening of the country's capital account position.

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File URL: http://research.stlouisfed.org/wp/more/1999-002
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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1999-002.

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Date of creation: 1999
Date of revision:
Publication status: Published in Economic Letters, v. 67, no. 2, May 2000, pp. 187-92
Handle: RePEc:fip:fedlwp:1999-002
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  1. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "What Caused the Asian Currency and Financial Crisis? Part II: The Policy Debate," NBER Working Papers 6834, National Bureau of Economic Research, Inc.
  2. Corsetti, G. & Pesenti, P. & Roubini, N., 1998. "What Caused the Asian Currency and Financial Crisis?," Papers 343, Banca Italia - Servizio di Studi.
  3. Paul R. Krugman, 1988. "Market-Based Debt-Reduction Schemes," NBER Working Papers 2587, National Bureau of Economic Research, Inc.
  4. Bruno, Michael & Fischer, Stanley, 1990. "Seigniorage, Operating Rules, and the High Inflation Trap," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 353-74, May.
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