Do high interest rates deter speculative attacks? - Evidence and some theory

Kevin Grier, Shu Lin

Research output: Contribution to journalArticle

3 Scopus citations

Abstract

This paper presents the first empirical evidence on the efficacy of raising interest rates ex ante as a deterrent to speculative attacks. Using a dataset that covers 54 countries from March 1964 through December 2005, we find strong evidence that raising interest rates in advance has significantly different impacts in different country groups. It significantly reduces the probability of attacks in countries that have a de facto hard peg but increases it in de facto soft-pegging countries. This finding is robust to alternative measure of monetary policy and to different specifications and samples. We then present a simple two-stage signaling model to offer a theoretical explanation for our empirical findings.

Original languageEnglish
Pages (from-to)938-950
Number of pages13
JournalJournal of International Money and Finance
Volume29
Issue number5
DOIs
StatePublished - Sep 2010

Keywords

  • Exchange rate regimes
  • Interest rate defenses
  • Signaling
  • Speculative attacks

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