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The Effect of Monetary Policy on Exchange Rates during Currency Crises: the Role of Debt, Institutions, and Financial Openness

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  • Sylvester C. W. Eijffinger
  • Benedikt Goderis

Abstract

This paper empirically examines the effect of monetary policy on exchange rates during currency crises. We find strong evidence that raising the interest rate: (i) has larger adverse balance sheet effects and is therefore less effective in countries with high domestic corporate short‐term debt; (ii) is more credible and therefore more effective in countries with high‐quality institutions; (iii) is more credible and therefore more effective in countries with high external debt; and (iv) is less effective in countries with high capital account openness. Our results support the idea that the effect of monetary policy depends on its impact on fundamentals, as well as its credibility, as suggested in the recent theoretical literature.

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  • Sylvester C. W. Eijffinger & Benedikt Goderis, 2008. "The Effect of Monetary Policy on Exchange Rates during Currency Crises: the Role of Debt, Institutions, and Financial Openness," Review of International Economics, Wiley Blackwell, vol. 16(3), pages 559-575, August.
    • Handle: RePEc:bla:reviec:v:16:y:2008:i:3:p:559-575
    DOI: 10.1111/j.1467-9396.2008.00745.x
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    Cited by:

    1. Nakatani, Ryota, 2017. "Structural vulnerability and resilience to currency crisis: Foreign currency debt versus export," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 132-143.
    2. Teimouri, Sheida & Zietz, Joachim, 2017. "Economic costs of alternative monetary policy responses to speculative currency attacks," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 419-434.
    3. Karatas, B., 2014. "Financial crisis and monetary policy," Other publications TiSEM 41e463f0-e122-4379-8db5-6, Tilburg University, School of Economics and Management.
    4. Ryota Nakatani, 2017. "The Effects of Productivity Shocks, Financial Shocks, and Monetary Policy on Exchange Rates: An Application of the Currency Crisis Model and Implications for Emerging Market Crises," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 53(11), pages 2545-2561, November.
    5. Ryota Nakatani, 2016. "Twin Banking and Currency Crises and Monetary Policy," Open Economies Review, Springer, vol. 27(4), pages 747-767, September.
    6. Eijffinger, Sylvester C.W. & Karataş, Bilge, 2012. "Currency crises and monetary policy: A study on advanced and emerging economies," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 948-974.
    7. Alibey Kudar, 2021. "Interest rate as the last link of chain during crisis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 3189-3203, April.

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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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