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Does Monetary Policy Stabilize the Exchange Rate Following a Currency Crisis?

  • Ilan Goldfajn
  • Poonam Gupta

This paper provides evidence on the relationship between monetary policy and the exchange rate in the aftermath of currency crises. It analyzes a large data set of currency crises in 80 countries for the period 1980-98. The main question addressed is: Can monetary policy increase the probability of reversing a postcrisis undervaluation through nominal appreciation rather than higher inflation? We find that tight monetary policy facilitates the reversal of currency undervaluation through nominal appreciation. When the economy also faces a banking crisis, the results are not robust: depending on the specification, tight monetary policies may not have the same effect.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 99/42.

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Length: 32
Date of creation: 01 Mar 1999
Date of revision:
Handle: RePEc:imf:imfwpa:99/42
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