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

Author

Listed:
  • Ilan Goldfajn

    () (Department of Economics PUC-Rio)

  • Poonam Gupta

    ()

Abstract

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.

Suggested Citation

  • Ilan Goldfajn & Poonam Gupta, 1999. "Does monetary policy stabilize the exchange rate following a currency crisis?," Textos para discussão 396, Department of Economics PUC-Rio (Brazil).
  • Handle: RePEc:rio:texdis:396
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    File URL: http://www.econ.puc-rio.br/pdf/td396.pdf
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    References listed on IDEAS

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    1. Allan Drazen & Paul R. Masson, 1994. "Credibility of Policies Versus Credibility of Policymakers," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 735-754.
    2. Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1994. "Speculative Attacks on Pegged Exchange Rates: An Empirical Exploration with Special Reference to the European Monetary System," CEPR Discussion Papers 1060, C.E.P.R. Discussion Papers.
    3. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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