Output costs, currency crises, and interest rate defense of a peg
By: Amartya Lahiri, Carlos A. Vegh.
Contributors: Végh Gramont, Carlos A., 1958-; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 11791; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 11791.
Publisher: National Bureau of Economic Research
Published: 2005
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Currency crises.; Interest rates.
Description: "Central banks typically raise short-term interest rates to defend currency pegs.  Higher interest rates, however, often lead to a credit crunch and an output contraction.  We model this trade-off in an optimizing, first-generation model in which the crisis may be delayed but is ultimately inevitable.  We show that higher interest rates may delay the crisis, but raising interest rates beyond a certain point may actually bring forward the crisis due to the large negative output effect.  The optimal interest rate defense involves setting high interest rates (relative to the no defense case) both before and at the moment of the crisis.  Furthermore, while the crisis could be delayed even further, it is not optimal to do so"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
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Mode of access: World Wide Web.