Currency Crises and Monetary Policy in Economies with Partial Dollarisation of Liabilities

Peter Flaschel, Christian Proaño and Willi Semmler

No 05-2006, IMK Working Paper from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute

Abstract: The right response to a speculative attack on the domestic currency by monetary authorities in a country with liabilities in US dollars has been a matter of hot debate among academics and policy makers especially after the East Asian Crisis. Using a modified version of the currency crisis model discussed in Proano, Flaschel and Semmler (2005) the authors show that an increase of the domestic interest rate by the central bank as a response to the speculative attack can have serious negative effects on aggregate demand by depressing the investment activity of those domestic firms which are not indebted in foreign currency. The authors demonstrate that in specific situations the standard (IMF supported) increase of the domestic interest rate might not be the best response to a speculative attack on the domestic currency from a medium term point of view.

Keywords: Mundell-Fleming-Tobin model; liability dollarisation; debt-financed investment; financial crisis; currency crisis; deflation. (search for similar items in EconPapers)
JEL-codes: E31 E32 E37 E52 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2006-06
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac, nep-mon and nep-sea
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Related works:
Journal Article: Currency Crises and Monetary Policy in Economies with Partial Dollarization of Liabilities (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:imk:wpaper:05-2006

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