Do High Interest Rates Defend Currencies During Speculative Attacks? New Evidence

17 Pages Posted: 31 Mar 2008

See all articles by Benedikt Goderis

Benedikt Goderis

The Netherlands Institute for Social Research|SCP

Vasso Ioannidou

Centre for Economic Policy Research (CEPR); The Business School (formerly Cass)

Abstract

Kraay (2003) documents the lack of any systematic association between monetary policy and the outcome of a speculative attack. This paper revisits Kraay's work and modifies it by introducing an improved measure of monetary policy and an additional country-specific fundamental, short-term corporate debt, to capture balance sheet vulnerabilities emphasized by the recent currency crises literature. The results show that for low levels of short-term corporate debt, raising interest rates lowers the probability of a successful attack. This effect decreases and eventually reverses for higher levels of debt. These findings contrast earlier empirical evidence and imply a fundamental reconsideration of the role of monetary policy during currency crises.

Keywords: speculative attacks, currency crises, monetary policy, short-term debt

JEL Classification: E52, E58

Suggested Citation

Goderis, Benedikt and Ioannidou, Vasso and Ioannidou, Vasso, Do High Interest Rates Defend Currencies During Speculative Attacks? New Evidence. Journal of International Economics, Vol. 74, No. 1, 2008, Available at SSRN: https://ssrn.com/abstract=1095698

Benedikt Goderis (Contact Author)

The Netherlands Institute for Social Research|SCP ( email )

Rijnstraat 50
The Hague, 2515
Netherlands

Vasso Ioannidou

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

The Business School (formerly Cass) ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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