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Does monetary policy stabilize the exchange rate following a currency crisis?

  • Ilan Goldfajn

    ()

    (Department of Economics PUC-Rio)

  • 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 in the period 1980 to 1998. The main question addressed is: can monetary policy significantly alter the probability of reversing the post-crisis undervaluation through nominal appreciation rather than higher inflation? We find that tight monetary policy facilitates the reversal of currency undervaluation through nominal appreciation rather than inflation. When the economy is also facing a banking crisis, depending on the specification, tight monetary policy may not have the same effect.

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File URL: http://www.econ.puc-rio.br/pdf/td396.pdf
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Paper provided by Department of Economics PUC-Rio (Brazil) in its series Textos para discussão with number 396.

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Length: 32 pages
Date of creation: Feb 1999
Date of revision:
Handle: RePEc:rio:texdis:396
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  1. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  2. Paul R. Masson & Allan Drazen, 1994. "Credibility of Policies Versus Credibility of Policymakers," IMF Working Papers 94/49, International Monetary Fund.
  3. Barry Eichengreen & Andrew K. Rose & Charles Wyplosz, 1994. "Speculative Attacks on Pegged Exchange Rates: An Empirical Exploration with Special Reference to the European Monetary System," NBER Working Papers 4898, National Bureau of Economic Research, Inc.
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