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Does Monetary Policy Stabilize the Exchange Rate Following a Currency Crisis? [electronic resource] / Ilan Goldfajn.

By: Goldfajn, Ilan.
Contributor(s): Gupta, Poonam.
Material type: materialTypeLabelBookSeries: IMF Working Papers; Working Paper: No. 99/42Publisher: Washington, D.C. : International Monetary Fund, 1999Description: 1 online resource (32 p.).ISBN: 1451846193 :.ISSN: 1018-5941.Subject(s): Interest Rates | Real Interest Rate | Tight Monetary Policy | Bahrain | Brazil | Cameroon | Korea, Republic of | Sri LankaAdditional physical formats: Print Version:: Does Monetary Policy Stabilize the Exchange Rate Following a Currency Crisis?Online resources: IMF e-Library | IMF Book Store 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.
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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.

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