Do High Interest Rates Defend Currencies During Speculative Attacks? New Evidence
17 Pages Posted: 31 Mar 2008
Abstract
Kraay (2003) 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.
Keywords: speculative attacks, currency crises, monetary policy, short-term debt
JEL Classification: E52, E58
Suggested Citation: Suggested Citation
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