Monetary policy during speculative attacks: Are there adverse medium term effects?

U. Michael Bergman and Mads Jellingsø

The North American Journal of Economics and Finance, 2010, vol. 21, issue 1, 5-18

Abstract: This paper extends the currency crises model of Aghion, Bacchetta and Banerjee (2000, 2001, 2004) in different directions. Our main result is that a tight monetary policy can have adverse effects beyond the short term and can potentially cause a currency crisis in the medium term, even in cases when the interest rate defense is successful and prevented a currency crisis in the short-run. In addition, we add a risk premium and find that this increases the likelihood of a crisis, can help explain contagion, and that prospective capital controls will increase the likelihood that such controls will be needed as an emergency measure.

Keywords: Speculative; attacks; Foreign-currency; debt; Balance; sheets; Interest; parity; Risk; premium; Contagion; Prospective; capital; control; Monetary; policy (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:21:y:2010:i:1:p:5-18

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