Does Monetary Policy Stabilize the Exchange Rate Following a Currency Crisis?

Author/Editor:

Ilan Goldfajn ; Poonam Gupta

Publication Date:

March 1, 1999

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

Series:

Working Paper No. 1999/042

Subject:

Currency crises Exchange rates Financial crises Financial services Foreign exchange Monetary policy Monetary tightening Real exchange rates Real interest rates

English

Publication Date:

March 1, 1999

ISBN/ISSN:

9781451846195/1018-5941

Stock No:

WPIEA0421999

Pages:

32

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