01785cas a2200253 a 4500 AALejournalIMF001333 230101c9999 xx r poo 0 0eng d 5.00 USD 9781451857665 1018-5941 BD-DhAAL BD-DhAAL Jeanne, Olivier. An Interest Rate Defense of a Fixed Exchange Rate? / Olivier Jeanne, Robert Flood. Washington, D.C. : International Monetary Fund, 2000. 1 online resource (19 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students 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. Mode of access: Internet Flood, Robert. IMF Working Papers; Working Paper ; No. 2000/159 Full text available on IMF http://elibrary.imf.org/view/journals/001/2000/159/001.2000.issue-159-en.xml IMF e-Library