Do high interest rates defend currencies during speculative attacks? New evidence |
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Authors: | Benedikt Goderis Vasso P Ioannidou |
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Institution: | a Centre for the Study of African Economies, Department of Economics, University of Oxford, Manor Road, Oxford OX1 3UQ, UK b Department of Finance and Center, Tilburg University, P.O. Box 90153, 5000 LE Tilburg, The Netherlands |
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Abstract: | Kraay Kraay, A., 2003. Do high interest rates defend currencies during speculative attacks? Journal of International Economics 59, 297-321.] documents the lack of any systematic association between monetary policy and the outcome of a speculative attack. This paper revisits Kraay's work and modifies it 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. |
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Keywords: | Speculative attacks Currency crises Monetary policy Short-term debt |
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