We study the interaction of fiscal and monetary policies during a currency crisis in an economy with government nominal liabilities. We show that the stock and maturity of these liabilities are key determinants of the magnitude, timing and predictability of a devaluation. Among notable features...

The paper studies an optimal switching policy between fixed and floating exchange rate regimes when the central bank dislikes losing reserves. We show that the optimal central bank intervention rule is not fully transparent in that the central bank will choose to randomize the devaluation over a...

The outcome of a speculative attack on the foreign exchange rate can be classified into three cases: (i) immediate depreciation of the nominal exchange rate, (ii) successful defense, or (iii) failed defense. This paper explores which of these outcomes yields the lowest cost in terms of output...

It is well documented in the literature that identified vector autoregression (VAR) models often produce puzzling results when the effect of unexpected monetary policy movements is estimated. Many authors find that raising interest rate generates protracted appreciation of the exchange rate (the...

This paper investigates the relation between monetary conditions and the excess returns arising from an investment strategy that consists of borrowing low-interest rate currencies and investing in currencies with high interest rates, so-called "carry trade". The results indicate that carry trade...

In currency exchange markets, there is a conflict between individual decisions and the socially optimal solution. Whereas agents have a coordination motive to take the same position, at the social level effective market coordination per se is not socially valuable, and the central bank aims at...

This paper investigates the relation between monetary conditions and the excess returns arising from currency carry trades. The results indicate that carry trade average return, Sharpe ratio and downside risk differ substantially across monetary conditions before the onset of the financial...

This paper examines how carry trade activity affects the transmission of monetary policy in currency markets. It analyzes a set of developed and emerging market currencies against the U.S. dollar. The U.S. dollar appreciates in response to a conventional monetary policy shock but depreciates to...

The taper tantrum episode induced a sudden outflow of capital from emerging markets back to the United States. This paper analyzes exchange market pressure in 93 developing and emerging market economies during this episode, drawing on recent methodological improvements in measuring exchange...