Interest Rate Defenses of Currency Pegs:
This paper studies a policy often used to defend a currency peg: raising short-term interest rates. The rationale for this policy is to stem demand for foreign reserves. Yet, this mechanism is absent from most monetary models. This paper develops a general equilibrium model with asset market frictio...
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Format: | Elektronisch E-Book |
Sprache: | English |
Veröffentlicht: |
Washington, D.C
International Monetary Fund
2004
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Schriftenreihe: | IMF Working Papers
Working Paper No. 04/85 |
Online-Zugang: | UBW01 UEI01 LCO01 SBR01 UER01 SBG01 UBG01 FAN01 UBT01 FKE01 UBY01 UBA01 FLA01 UBM01 UPA01 UBR01 FHA01 FNU01 BSB01 TUM01 Volltext |
Zusammenfassung: | This paper studies a policy often used to defend a currency peg: raising short-term interest rates. The rationale for this policy is to stem demand for foreign reserves. Yet, this mechanism is absent from most monetary models. This paper develops a general equilibrium model with asset market frictions where this policy can be effective. The friction I emphasize is the same as in Lucas (1990): money is required for asset transactions. When the government raises domestic interest rates, agents want to increase their holdings of domestic currency in order to acquire more domestic-currency-denominated assets. Thus, agents do not run on the reserves of the central bank, and the peg survives. A key implication of the model is that an interest rate defense can always be successful, but at great costs for domestic agents. Hence the reluctance of governments to sustain this policy for long periods of time |
Beschreibung: | 1 Online-Ressource (35 p) |
ISBN: | 1451850786 9781451850789 |
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spelling | Sole, Juan Verfasser aut Interest Rate Defenses of Currency Pegs Sole, Juan Washington, D.C International Monetary Fund 2004 1 Online-Ressource (35 p) txt rdacontent c rdamedia cr rdacarrier IMF Working Papers Working Paper No. 04/85 This paper studies a policy often used to defend a currency peg: raising short-term interest rates. The rationale for this policy is to stem demand for foreign reserves. Yet, this mechanism is absent from most monetary models. This paper develops a general equilibrium model with asset market frictions where this policy can be effective. The friction I emphasize is the same as in Lucas (1990): money is required for asset transactions. When the government raises domestic interest rates, agents want to increase their holdings of domestic currency in order to acquire more domestic-currency-denominated assets. Thus, agents do not run on the reserves of the central bank, and the peg survives. A key implication of the model is that an interest rate defense can always be successful, but at great costs for domestic agents. Hence the reluctance of governments to sustain this policy for long periods of time Online-Ausg http://elibrary.imf.org/view/IMF001/03635-9781451850789/03635-9781451850789/03635-9781451850789.xml Verlag URL des Erstveröffentlichers Volltext |
spellingShingle | Sole, Juan Interest Rate Defenses of Currency Pegs |
title | Interest Rate Defenses of Currency Pegs |
title_auth | Interest Rate Defenses of Currency Pegs |
title_exact_search | Interest Rate Defenses of Currency Pegs |
title_exact_search_txtP | Interest Rate Defenses of Currency Pegs |
title_full | Interest Rate Defenses of Currency Pegs Sole, Juan |
title_fullStr | Interest Rate Defenses of Currency Pegs Sole, Juan |
title_full_unstemmed | Interest Rate Defenses of Currency Pegs Sole, Juan |
title_short | Interest Rate Defenses of Currency Pegs |
title_sort | interest rate defenses of currency pegs |
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