Fighting against currency depreciation, macroeconomic instability, and sudden stops
By: Luis-Felipe Zanna
Contributors: Board of Governors of the Federal Reserve System (U.S.)
Series: International finance discussion papers -- no. 848; International finance discussion papers (Online) -- no. 848.
Publisher: Federal Reserve Board
Published: 2005
Place of publication: Washington, D.C
Language: eng
Format: [electronic resource] /
Description: "In this paper we show that in the aftermath of a crisis, a government that changes the nominal interest rate in response to currency depreciation can induce aggregate instability in the economy by generating self-fulfilling endogenous cycles.  In particular if a government raises the interest rate proportionally more than an increase in currency depreciation then it induces self-fulfilling cyclical equilibria that are able to replicate some of the empirical regularities of emerging market crises.  We construct an equilibrium characterized by the self-validation of people's expectations about currency depreciation and by the following stylized facts of the "Sudden Stop" phenomenon: a decline in domestic production and aggregate demand, a significantly larger currency depreciation, a collapse in asset prices, a sharp correction in the price of traded goods relative to non-traded goods, and an improvement in the current account deficit"--Federal Reserve Board web site.
Notes: Title from PDF file as viewed on 3/17/2006.

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