EconPapers    
Economics at your fingertips  
 

Fighting Inflation with High Interest Rates: The Small Open Economy Case under Flexible Prices

Guillermo Calvo and Carlos Vegh

Journal of Money, Credit and Banking, 1995, vol. 27, issue 1, 49-66

Abstract: In high inflation countries, policymakers often end up paying interest on part of the money supply. Higher interest rates on money have been used both to reduce inflation and to defend the domestic currency. This paper analyzes the effectiveness of such a policy in the context of an open economy with flexible prices and exchange rates. A temporary increase in the interest rate on money reduces the price level on impact but inflation follows an explosive path afterwards. The domestic currency appreciates on impact but begins to depreciate immediately thereafter. Hence, the analysis does not support the use of high interest rates in disinflationary programs. Copyright 1995 by Ohio State University Press.

Date: 1995
References: Add references at CitEc
Citations: View citations in EconPapers (45)

Downloads: (external link)
http://links.jstor.org/sici?sici=0022-2879%2819950 ... 0.CO%3B2-M&origin=bc full text (application/pdf)
Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:27:y:1995:i:1:p:49-66

Access Statistics for this article

Journal of Money, Credit and Banking is currently edited by Robert deYoung, Paul Evans, Pok-Sang Lam and Kenneth D. West

More articles in Journal of Money, Credit and Banking from Blackwell Publishing
Bibliographic data for series maintained by Wiley-Blackwell Digital Licensing () and Christopher F. Baum ().

 
Page updated 2025-03-19
Handle: RePEc:mcb:jmoncb:v:27:y:1995:i:1:p:49-66