Does Monetary Policy Stabilize the Exchange Rate Following a Currency Crisis?
IMF Working Papers, March 1, 1999
Source details
- Canonical URL
- Does Monetary Policy Stabilize the Exchange Rate Following a Currency Crisis?
Other formats
Bibliographic details
- Authors: Ilan Goldfajn, Poonam Gupta
- Published: March 1, 1999
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451846195.001
Summary
- Paper analyzes the relationship between monetary policy and the exchange rate in the aftermath of currency crises.
- Dataset covers currency crises in 80 countries for the period 1980-98.
- Central question: Can monetary policy increase the probability of reversing a postcrisis undervaluation through nominal appreciation rather than higher inflation?
- Main finding: Tight monetary policy facilitates the reversal of currency undervaluation through nominal appreciation.
- Conditional finding: When the economy also faces a banking crisis, results are not robust; depending on the specification, tight monetary policies may not have the same effect.
Major Findings and Conclusions
- Tight monetary policy is associated with a higher probability that postcrisis undervaluation is reversed via nominal appreciation rather than via higher inflation.
- The presence of a contemporaneous banking crisis alters robustness: tight monetary policy may not reliably produce the same exchange rate reversal outcome across specifications.
Data, Scope, and Methods (as described)
- Sample: currency crises in 80 countries.
- Time period: 1980-98.
- Paper length: 32 pages.
- Publication date: March 1, 1999.
- Series and identifiers:
- Series: Working Paper No. 1999/042
- Volume: 1999
- Issue: 042
- Stock No: WPIEA0421999
- DOI: https://doi.org/10.5089/9781451846195.001
- ISBN: 9781451846195
- ISSN: 1018-5941
Policy Implications and Considerations
- Tight monetary policy can be an effective tool to stabilize the exchange rate after a currency crisis by promoting nominal appreciation rather than fueling inflation.
- Policymakers should exercise caution when banking sector problems coexist with a currency crisis, as the effectiveness of monetary tightening on exchange rate stabilization may be weakened or specification-dependent.
Source: IMF Working Paper — “Does Monetary Policy Stabilize the Exchange Rate Following a Currency Crisis?” by Ilan Goldfajn and Poonam Gupta, March 1, 1999.
Content in this bundle
- Does Monetary Policy Stabilize the Exchange Rate Following a Currency Crisis? - WP/99/42