An Interest Rate Defense of a Fixed Exchange Rate? /
Defending a government's exchange-rate commitment with active interest rate policy is not an option in the Krugman-Flood-Garber (KFG) model of speculative attacks. In that model, the interest rate is the passive reflection of currency-depreciation expectations. In this paper we show how to adap...
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| Format: | Tidsskrift |
| Sprog: | English |
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Washington, D.C. :
International Monetary Fund,
2000.
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| Serier: | IMF Working Papers; Working Paper ;
No. 2000/159 |
| Online adgang: | Full text available on IMF |
| Summary: | Defending a government's exchange-rate commitment with active interest rate policy is not an option in the Krugman-Flood-Garber (KFG) model of speculative attacks. In that model, the interest rate is the passive reflection of currency-depreciation expectations. In this paper we show how to adapt the KFG model to allow for an interest rate defense. It is shown that increasing the domestic-currency interest rate makes domestic assets more attractive according to an asset substitution effect, but weakens the domestic currency by increasing the government's fiscal liabilities. As a result, raising the interest rate hastens the speculative attack when speculation is motivated by underlying fiscal fragility. |
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| Emne beskrivelse: | <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required |
| Fysisk beskrivelse: | 1 online resource (19 pages) |
| Format: | Mode of access: Internet |
| ISSN: | 1018-5941 |
| Adgang: | Electronic access restricted to authorized BRAC University faculty, staff and students |