A Simple Test of the Effect of Interest Rate Defense

Allan Drazen () and Stefan Hubrich

No 12616, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: High interest rates to defend the exchange rate signal that a government is committed to fixed exchange rates, but may also signal weak fundamentals. We test the effectiveness of the interest rate defense by disaggregating into the effects on future interest rates differentials, expectations of future exchange rates, and risk premia. While much previous empirical work has been inconclusive due to offsetting effects, tests that "disaggregate" the effects provide significant information. Raising overnight interest rates strengthens the exchange rate over the short-term, but also leads to an expected depreciation at a horizon of a year and longer and an increase in the risk premium, consistent with the argument that it also signals weak fundamentals.

JEL-codes: F31 F33 (search for similar items in EconPapers)
Date: 2006-10
New Economics Papers: this item is included in nep-mon
Note: DAE IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Published as Drazen, Allan & Hubrich, Stefan, 2006. "A simple test of the effect of interest rate defense," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 612-636, December.

Downloads: (external link)
http://www.nber.org/papers/w12616.pdf (application/pdf)

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:nbr:nberwo:12616

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w12616

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().