Does Monetary Policy Stabilize the Exchange Rate Following a Currency Crisis?

Ilan Goldfajn and Poonam Gupta

No 1999/042, IMF Working Papers from International Monetary Fund

Abstract: This paper provides evidence on the relationship between monetary policy and the exchange rate in the aftermath of currency crises. It analyzes a large data set of currency crises in 80 countries for the period 1980-98. The main question addressed is: Can monetary policy increase the probability of reversing a postcrisis undervaluation through nominal appreciation rather than higher inflation? We find that tight monetary policy facilitates the reversal of currency undervaluation through nominal appreciation. When the economy also faces a banking crisis, the results are not robust: depending on the specification, tight monetary policies may not have the same effect.

Keywords: WP; tight monetary policy; undervaluation episode; term undervaluation; undervaluation case; currency crisis; Monetary policy; interest rates; inflation; exogenous monetary policy variable; currency undervaluation; undervaluation series; further undervaluation; Monetary tightening; Real exchange rates; Real interest rates; Exchange rates; Currency crises; Global (search for similar items in EconPapers)
Pages: 32
Date: 1999-03-01
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Citations: View citations in EconPapers (47)

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Related works:
Journal Article: Does Monetary Policy Stabilize the Exchange Rate Following a Currency Crisis? (2003)
Working Paper: Does monetary policy stabilize the exchange rate following a currency crisis? (1999)
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