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To intervene, or not to intervene : Monetary policy and the costs of currency crises

Title data

Erler, Alexander ; Bauer, Christian ; Herz, Bernhard:
To intervene, or not to intervene : Monetary policy and the costs of currency crises.
In: Journal of international Money and Finance. Vol. 51 (March 2015) . - pp. 432-456.
ISSN 0261-5606
DOI: https://doi.org/10.1016/j.jimonfin.2014.12.010

Abstract in another language

In case of speculative attacks, the central banks' decisions to intervene or not to intervene seem to play an important role for the economic costs of currency crises. The central bank can either abstain from intervening or start an intervention, which in turn can be successful or unsuccessful. Therefore, an adequate analysis of the costs of currency crises has to take into account three different types of currency crises: (i) an immediate depreciation without any central bank interventions, (ii) a successful defense, and (iii) an unsuccessful attempt to defend the exchange rate. We find that the decision of the central bank to intervene or to remain passive is risky. If the central bank intervenes and succeeds she can achieve the best growth performance on average. However, if the interventions are not maintained and the currency depreciates the subsequent output loss is particularly severe. Abstaining from an intervention yields a scenario with a relatively small drop in output. Giving in to a speculative attack rather than trying to fight it can thus be a suitable option for a risk-averse central bank.

Further data

Item Type: Article in a journal
Refereed: Yes
Keywords: Currency crises; Monetary policy
Subject classification: JEL classification: E42; E58; F31
Institutions of the University: Faculties
Faculties > Faculty of Law, Business and Economics
Faculties > Faculty of Law, Business and Economics > Department of Economics
Faculties > Faculty of Law, Business and Economics > Department of Economics > Chair Economics I
Faculties > Faculty of Law, Business and Economics > Department of Economics > Chair Economics I > Chair Economics I - Univ.-Prof. Dr. Bernhard Herz
Result of work at the UBT: Yes
DDC Subjects: 300 Social sciences > 330 Economics
Date Deposited: 30 Nov 2017 08:01
Last Modified: 30 Nov 2017 08:01
URI: https://eref.uni-bayreuth.de/id/eprint/40596