Hidden Bibliographic Details
| Other authors / contributors: | International Monetary Fund. International Capital Markets, issuing body.
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| ISBN: | 1451896905
9781451896909
128160142X
9781281601421
146233685X
9781462336852
1452793646
9781452793641
9786613782113
6613782114
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| ISSN: | 2227-8885
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| Notes: | Restrictions unspecified
Electronic reproduction. [S.l.] : HathiTrust Digital Library, 2010.
Master and use copy. Digital master created according to Benchmark for Faithful Digital Reproductions of Monographs and Serials, Version 1. Digital Library Federation, December 2002. http://purl.oclc.org/DLF/benchrepro0212
English.
digitized 2010 HathiTrust Digital Library committed to preserve
Print version record.
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| Summary: | 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.
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| Other form: | Print version: Solé, Juan. Interest rate defenses of currency pegs. [Washington, D.C.] : International Monetary Fund, International Capital Markets, 2004
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| Standard no.: | 10.5089/9781451896909.001
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