Does Monetary Policy Stabilize the Exchange Rate Following a Currency Crisis?

32 Pages Posted: 10 Aug 1999

See all articles by Ilan Goldfajn

Ilan Goldfajn

Gávea Investimentos; Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics; Central Bank of Brazil

Poonam Gupta

Delhi School of Economics

Date Written: March 1999

Abstract

This paper provides evidence on the relationship between monetary policy and the exchange rate in the aftermath of currency crises. It analyzes a large data set of currency crises in 80 countries for the period 1980-1998. The main question addressed is: Can monetary policy increase the probability of reversing a postcrisis undervaluation through nominal appreciation rather than higher inflation? We find that tight monetary policy facilitates the reversal of currency undervaluation through nominal appreciation. When the economy also faces a banking crisis, the results are not robust: depending on the specification, tight monetary policies may not have the same effect.

JEL Classification: E44, E63

Suggested Citation

Goldfajn, Ilan and Gupta, Poonam, Does Monetary Policy Stabilize the Exchange Rate Following a Currency Crisis? (March 1999). IMF Working Paper No. 99/42. Available at SSRN: https://ssrn.com/abstract=164350 or http://dx.doi.org/10.2139/ssrn.164350

Ilan Goldfajn (Contact Author)

Gávea Investimentos ( email )

Rua Dias Ferreira, 190 7th andar
22431-050 Rio de Janeiro
Brazil

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia DF 70074-900, Distr. Federal 70074-900
Brazil
61-4143232 (Phone)
61-2260767 (Fax)

Poonam Gupta

Delhi School of Economics ( email )

Department of Economics
Delhi University
Delhi, Delhi 110007
India

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