By Michael P. Dooley, Jeffrey A. Frankel
The administration of economic crises in rising markets is an important and high-stakes problem in an more and more worldwide economic climate. therefore, it is also a hugely contentious factor in brand new public coverage circles. during this e-book, major economists-many of whom have additionally participated in coverage debates on those issues-consider how top to lessen the frequency and price of such crises. The contributions the following discover the administration strategy from the start of a difficulty to the long term results of the thoughts used to reduce it. the 1st 3 chapters concentrate on the earliest responses and the rapid protection of a forex below assault, exploring even if pointless harm to economies could be refrained from by means of adopting the appropriate reaction in the first few days of a monetary main issue. subsequent, members learn the adjustment courses that persist with, contemplating tips on how to layout those courses so they shorten the restoration part, motivate financial progress, and reduce the likelihood of destiny problems. eventually, the final 4 papers examine the particular results of adjustment courses, asking whether or not they accomplish what they're designed to do-and no matter if, as many critics assert, they impose disproportionate charges at the poorest contributors of society. fresh high-profile foreign money crises have confirmed not just how destructive they are often to neighboring economies and buying and selling companions, but additionally how vital coverage responses should be in opting for their length and severity. Economists and policymakers will welcome the insightful reviews during this very important quantity, and people of its spouse, Sebastian Edwards and Jeffrey A. Frankel's fighting foreign money Crises in rising Markets.
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Extra info for Managing Currency Crises in Emerging Markets (National Bureau of Economic Research Conference Report)
Goldfajn and Baig (1998) and Dekle, Hsiao, and Wang (1999) find sharp evidence that interest rates appreciate exchange rates, whereas Gould and Kamin (2000) are unable to find a reliable relationship between interest rates and exchange rates. As to the work using cross-country or panel data, the results are again mixed. Goldfajn and Gupta (1999) find that high interest rates appreciate the exchange rate, but only in countries with strong banking sectors. Furman and Stiglitz (1998) find that if the sample is restricted to low-inflation countries—which include East Asia—high interest rates lead to exchange rate depreciations.
2 A Basic Model of Signaling Commitment I begin with a model of signaling commitment to keeping the exchange rate fixed by raising short-term interest rates. I want to keep the model ex- 40 Allan Drazen tremely simple in order to highlight how this signaling of commitment might work, that is, how raising interest rates allows a government that is committed to defending the exchange rate to separate itself in the eyes of investors from one that is not. The model presented is a variant of the model in Drazen (2001).
Truman made a reference to Turkey’s failed interest rate defense and remarked that the political implications of an interest rate defense should not be overlooked. Shafer added that Turkey’s unwillingness to supply reserves to banks that were being squeezed in the interbank market for the financial sector caused the failure. Andrew Berg pointed to the diﬀerence between the defense of a peg and a crisis in a free float. He added that the degree of capital mobility is essential in thinking about the interest rate defense.