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Currency Crises and Macroeconomic Performance

Author

Listed:
  • Luke Gower

    (Reserve Bank of Australia)

  • Alan Krause

    (Reserve Bank of Australia)

Abstract

This paper presents some theory and evidence on the implications of sudden currency depreciations for output and inflation. It identifies some of the characteristics shared by countries which have suffered falling output in the aftermath of a currency crisis, and it presents a small model which rationalises aspects of this common experience. The model is then used to derive the optimal monetary policy response to a crisis. A key result is that a currency crisis which coincides with a banking crisis is more likely to depress output and may call for an accommodating monetary policy.

Suggested Citation

  • Luke Gower & Alan Krause, 2002. "Currency Crises and Macroeconomic Performance," RBA Research Discussion Papers rdp2002-08, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp2002-08
    as

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    File URL: https://www.rba.gov.au/publications/rdp/2002/pdf/rdp2002-08.pdf
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    References listed on IDEAS

    as
    1. Willem H. Buiter & Marcus Miller, 1991. "Real Exchange Rate Overshooting and the Output Cost of Bringing Down Inflation," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 239-277, National Bureau of Economic Research, Inc.
    2. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2000. "A simple model of monetary policy and currency crises," European Economic Review, Elsevier, vol. 44(4-6), pages 728-738, May.
    3. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    4. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December.
    5. George Soros, 1999. "The International Financial Crisis," Challenge, Taylor & Francis Journals, vol. 42(2), pages 58-76, March.
    6. Kraay, Aart, 2003. "Do high interest rates defend currencies during speculative attacks?," Journal of International Economics, Elsevier, vol. 59(2), pages 297-321, March.
    7. Ilan Goldfajn & Poonam Gupta, 2003. "Does Monetary Policy Stabilize the Exchange Rate Following a Currency Crisis?," IMF Staff Papers, Palgrave Macmillan, vol. 50(1), pages 1-5.
    8. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December.
    9. Jason Furman & Joseph E. Stiglitz, 1998. "Economic Crises: Evidence and Insights from East Asia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 1-136.
    10. Michael Bordo & Barry Eichengreen, 1999. "Is our Current International Economic Environment Unusually Crisis Prone?," RBA Annual Conference Volume (Discontinued), in: David Gruen & Luke Gower (ed.),Capital Flows and the International Financial System, Reserve Bank of Australia.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    currency crises; monetary policy;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance

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