Monetary policy during speculative attacks: Are there adverse medium term effects?
This paper extends the currency crises model of Aghion, Bacchetta and Banerjee (2000, 2001, 2004) in different directions. Our main result is that a tight monetary policy can have adverse effects beyond the short term and can potentially cause a currency crisis in the medium term, even in cases when the interest rate defense is successful and prevented a currency crisis in the short-run. In addition, we add a risk premium and find that this increases the likelihood of a crisis, can help explain contagion, and that prospective capital controls will increase the likelihood that such controls will be needed as an emergency measure.
Year of publication: |
2010
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Authors: | Bergman, U. Michael ; Jellingsø, Mads |
Published in: |
The North American Journal of Economics and Finance. - Elsevier, ISSN 1062-9408. - Vol. 21.2010, 1, p. 5-18
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Publisher: |
Elsevier |
Keywords: | Speculative attacks Foreign-currency debt Balance sheets Interest parity Risk premium Contagion Prospective capital control Monetary policy |
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