Output Costs, Currency Crises, and Interest Rate Defense of a Peg /
Lahiri, Amartya.
Output Costs, Currency Crises, and Interest Rate Defense of a Peg / Amartya Lahiri, Carlos A. Vegh. - Cambridge, Mass. National Bureau of Economic Research 2005. - 1 online resource: illustrations (black and white); - NBER working paper series no. w11791 . - Working Paper Series (National Bureau of Economic Research) no. w11791. .
November 2005.
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.
System requirements: Adobe [Acrobat] Reader required for PDF files.
Mode of access: World Wide Web.
Output Costs, Currency Crises, and Interest Rate Defense of a Peg / Amartya Lahiri, Carlos A. Vegh. - Cambridge, Mass. National Bureau of Economic Research 2005. - 1 online resource: illustrations (black and white); - NBER working paper series no. w11791 . - Working Paper Series (National Bureau of Economic Research) no. w11791. .
November 2005.
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.
System requirements: Adobe [Acrobat] Reader required for PDF files.
Mode of access: World Wide Web.