TY - JOUR
T1 - Monetary policy during speculative attacks
T2 - Are there adverse medium term effects?
AU - Bergman, Ulf Michael
AU - Jellingsø, Mads
N1 - JEL classification: E51, F30, O11
PY - 2010/3
Y1 - 2010/3
N2 - This paper extends the currency crises model of Aghion, Bacchetta and Banerjee (2000, 2001, 2004) in different directions. Our main result is that a tight monetary policy can have adverse effects beyond the short term and can potentially cause a currency crisis in the medium term, even in cases when the interest rate defense is successful and prevented a currency crisis in the short-run. In addition, we add a risk premium and find that this increases the likelihood of a crisis, can help explain contagion, and that prospective capital controls will increase the likelihood that such controls will be needed as an emergency measure.
AB - This paper extends the currency crises model of Aghion, Bacchetta and Banerjee (2000, 2001, 2004) in different directions. Our main result is that a tight monetary policy can have adverse effects beyond the short term and can potentially cause a currency crisis in the medium term, even in cases when the interest rate defense is successful and prevented a currency crisis in the short-run. In addition, we add a risk premium and find that this increases the likelihood of a crisis, can help explain contagion, and that prospective capital controls will increase the likelihood that such controls will be needed as an emergency measure.
KW - Faculty of Social Sciences
KW - foreign-currency debt
KW - balance sheets
KW - interest parity
KW - risk premium
KW - contagion
KW - prospective capital control
KW - monetary policy
U2 - 10.1016/j.najef.2009.11.002
DO - 10.1016/j.najef.2009.11.002
M3 - Journal article
SN - 1062-9408
VL - 21
SP - 5
EP - 18
JO - North American Journal of Economics and Finance
JF - North American Journal of Economics and Finance
IS - 1
ER -