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Do high interest rates defend currencies during speculative attacks?: new evidence

Research output: Contribution to Journal/MagazineJournal articlepeer-review

<mark>Journal publication date</mark>01/2008
<mark>Journal</mark>Journal of International Economics
Issue number1
Number of pages12
Pages (from-to)158-169
Publication StatusPublished
<mark>Original language</mark>English


Kraay [Kraay, A., 2003. Do high interest rates defend currencies during speculative attacks? Journal of International Economics 59, 297-321.] documents the lack of any systematic association between monetary policy and the outcome of a speculative attack. This paper revisits Kraay's work and modifies it by introducing an improved measure of monetary policy and an additional country-specific fundamental, short-term corporate debt, to capture balance sheet vulnerabilities emphasized by the recent currency crises literature. The results show that for low levels of short-term corporate debt, raising interest rates lowers the probability of a successful attack. This effect decreases and eventually reverses for higher levels of debt. These findings contrast earlier empirical evidence and imply a fundamental reconsideration of the role of monetary policy during currency crises.