Tight Money in a Post-Crisis Defense of the Exchange Rate: What Have We Learned?

Peter Montiel

The World Bank Research Observer, 2003, vol. 18, issue 1, 1-23

Abstract: Critics of the tight monetary policies pursued by some of the countries hurt by the 1997 Asian financial crisis have questioned the presumption that tight money can help sustain the value of a currency. The issue is actually an empirical one because theory does not unambiguously predict the effect of tight money on the exchange rate under the circumstances faced by the crisis countries. This article reviews the empirical research and shows that the evidence does not yet support strong statements about post-crisis links between monetary policy and the exchange rate. Proposed deviations from a sustainable medium-term monetary policy stance should thus be viewed with skepticism. Copyright 2003, Oxford University Press.

Date: 2003
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