{
  "title": "Interest Rate Defenses of Currency Pegs",
  "publication": "IMF Working Papers, May 1, 2004",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/30/interest-rate-defenses-of-currency-pegs-17323",
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  "summary": "This paper studies a policy often used to defend a currency peg: raising short-term interest rates. The rationale for this policy is to stem demand for foreign reserves. Yet, this mechanism is absent from most monetary models.",
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    {
      "heading": "Research question and approach",
      "content": "- Studies a policy often used to defend a currency peg: raising short-term interest rates.\n- Develops a general equilibrium model with asset market frictions where this policy can be effective.\n- Emphasizes the friction from Lucas (1990): money is required for asset transactions."
    },
    {
      "heading": "Mechanism described",
      "content": "- Raising domestic interest rates increases agents' desire to hold domestic currency to acquire more domestic-currency-denominated assets.\n- As a result, agents do not run on the reserves of the central bank, allowing the peg to survive.\n- The paper notes this mechanism is absent from most monetary models."
    },
    {
      "heading": "Key findings and implications",
      "content": "- An interest rate defense can always be successful.\n- Such a defense comes at great costs for domestic agents.\n- The high domestic costs explain governments’ reluctance to sustain interest rate defenses for long periods of time."
    },
    {
      "heading": "Subjects and keywords",
      "content": "- Subjects: Asset prices, Bonds, Central bank policy rate, Currencies, Interest rate policy\n- Keywords: central bank, foreign currency, interest rate, WP\n\n---\n\n Content in this bundle\n\n- Interest Rate Defenses of Currency Pegs by Juan Sole\n  - Interest Rate Defenses of Currency Pegs by Juan Sole (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Interest Rate Defenses of Currency Pegs by Juan Sole (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/interest-rate-defenses-of-currency-pegs-17323"
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    "Authors: Juan Sole",
    "Published: May 1, 2004",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451850789.001",
    "Studies a policy often used to defend a currency peg: raising short-term interest rates.",
    "Develops a general equilibrium model with asset market frictions where this policy can be effective.",
    "Emphasizes the friction from Lucas (1990): money is required for asset transactions.",
    "Raising domestic interest rates increases agents' desire to hold domestic currency to acquire more domestic-currency-denominated assets.",
    "As a result, agents do not run on the reserves of the central bank, allowing the peg to survive.",
    "The paper notes this mechanism is absent from most monetary models.",
    "An interest rate defense can always be successful.",
    "Such a defense comes at great costs for domestic agents.",
    "The high domestic costs explain governments’ reluctance to sustain interest rate defenses for long periods of time.",
    "Subjects: Asset prices, Bonds, Central bank policy rate, Currencies, Interest rate policy",
    "Keywords: central bank, foreign currency, interest rate, WP",
    "**Interest Rate Defenses of Currency Pegs by Juan Sole**"
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