Abstract
When analyzing the appropriate monetary policy response during a currency crisis, it is important to keep in mind two distinct channels: (a) the impact of changing interest rates on exchange rates; and (b) the direct impact of exchange rate changes on output. The first pertains to the monetary side of the economy as given by the interest parity condition, while the second deals with the real side of the economy. The interaction between these two legs of the economy derives the equilibrium output and exchange rate changes in the economy. Thus, the net effect of monetary policy on output and exchange rate requires consideration of both dimensions of the economy.
This chapter draws on an article originally published in Emerging Markets Trade and Finance, 44 (3), 2008, 21–33 (M.E. Sharpe). Reprinted with permission.
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© 2009 Makarand Parulkar
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Parulkar, M. (2009). Understanding Currency Crises and Monetary Policy Responses in Emerging Economies. In: Rajan, R.S. (eds) Exchange Rates, Currency Crisis and Monetary Cooperation in Asia. Palgrave Macmillan, London. https://doi.org/10.1057/9780230234192_6
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DOI: https://doi.org/10.1057/9780230234192_6
Publisher Name: Palgrave Macmillan, London
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