Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/105881
Authors: 
Flaschel, Peter
Proaño, Christian
Semmler, Willi
Year of Publication: 
2006
Series/Report no.: 
IMK Working Paper 5/2006
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.
Subjects: 
Mundell-Fleming-Tobin model
liability dollarisation
debt-financed investment
financial crisis
currency crisis
deflation.
JEL: 
E31
E32
E37
E52
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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