Interest rate defenses of currency pegs /

Interest rate defenses of currency pegs /

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Bibliographic Details
Author / Creator:	Solé, Juan, author.
Imprint:	[Washington, D.C.] : International Monetary Fund, International Capital Markets, 2004.
Description:	1 online resource (35 pages).
Language:	English
Series:	IMF working paper ; WP/04/85 IMF working paper ; WP/04/85.
Subject:	Foreign exchange administration -- Econometric models. Interest rates -- Econometric models. Interest rates -- Canada -- Econometric models. Foreign exchange administration -- Econometric models. Interest rates -- Econometric models. Canada.
Format:	E-Resource Book
URL for this record:	http://pi.lib.uchicago.edu/1001/cat/bib/12497438

Hidden Bibliographic Details
Other authors / contributors:	International Monetary Fund. International Capital Markets, issuing body.
ISBN:	1451896905 9781451896909 128160142X 9781281601421 146233685X 9781462336852 1452793646 9781452793641 9786613782113 6613782114
ISSN:	2227-8885
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.
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.
Other form:	Print version: Solé, Juan. Interest rate defenses of currency pegs. [Washington, D.C.] : International Monetary Fund, International Capital Markets, 2004
Standard no.:	10.5089/9781451896909.001

Description
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.
Physical Description:	1 online resource (35 pages).
Format:	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.
ISBN:	1451896905 9781451896909 128160142X 9781281601421 146233685X 9781462336852 1452793646 9781452793641 9786613782113 6613782114
ISSN:	2227-8885