Actions for An Interest Rate Defense of a Fixed Exchange Rate? [electronic resource]

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An Interest Rate Defense of a Fixed Exchange Rate? [electronic resource]

Author
Jeanne, Olivier
Published
Washington : International Monetary Fund Oct. 2000
Physical Description
68 p.
Additional Creators
Flood, Robert P.
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Summary
Annotation Defending a governments 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 governments fiscal liabilities. As a result, raising the interest rate hastens the speculative attack when speculation is motivated by underlying fiscal fragility.
Genre(s)
ISBN
9781451857665
1451857667 (Trade Paper)
View MARC record | catkey: 31849960