Do High Interest Rates Defend Currencies During Speculative Attacks? New evidence

Benedikt Goderis and Vasso Ioannidou ()

No 2006-11, CSAE Working Paper Series from Centre for the Study of African Economies, University of Oxford

Abstract: A recent paper by Kraay (2003) documents the lack of any systematic association between monetary policy and the outcome of a speculative attack. This paper extends Kraay’s work 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 (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (14)

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Journal Article: Do high interest rates defend currencies during speculative attacks New evidence (2008)
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