Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Do high interest rates defend currencies during speculative attacks?
T2 - new evidence
AU - Goderis, Benedikt
AU - Ioannidou, Vasso P.
PY - 2008/1
Y1 - 2008/1
N2 - 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.
AB - 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.
KW - Speculative attacks
KW - Currency crises
KW - Monetary policy
KW - Short-term debt
U2 - 10.1016/j.jinteco.2007.05.003
DO - 10.1016/j.jinteco.2007.05.003
M3 - Journal article
VL - 74
SP - 158
EP - 169
JO - Journal of International Economics
JF - Journal of International Economics
SN - 0022-1996
IS - 1
ER -