Does Monetary Policy Stabilize the Exchange Rate Following a Currency Crisis?
March 1, 1999
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Summary
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 for the period 1980-98. The main question addressed is: Can monetary policy increase the probability of reversing a postcrisis undervaluation through nominal appreciation rather than higher inflation? We find that tight monetary policy facilitates the reversal of currency undervaluation through nominal appreciation. When the economy also faces a banking crisis, the results are not robust: depending on the specification, tight monetary policies may not have the same effect.
Subject: Currency crises, Exchange rates, Financial crises, Financial services, Foreign exchange, Monetary policy, Monetary tightening, Real exchange rates, Real interest rates
Keywords: Currency crises, currency crisis, currency undervaluation, Exchange rates, exogenous monetary policy variable, further undervaluation, Global, inflation, interest rates, Monetary policy, Monetary tightening, Real exchange rates, Real interest rates, term undervaluation, tight monetary policy, undervaluation case, undervaluation episode, undervaluation series, WP
Pages:
32
Volume:
1999
DOI:
Issue:
042
Series:
Working Paper No. 1999/042
Stock No:
WPIEA0421999
ISBN:
9781451846195
ISSN:
1018-5941
