search query: @author Lahiri, A. / total: 5
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| Author: | Lahiri, A. Vegh, C. A. |
| Title: | Delaying the Inevitable: Interest Rate Defense and Balance of Payments Crises |
| Journal: | Journal of Political Economy
2003 : APR, VOL. 111:2, p. 404-424 |
| Index terms: | INTEREST RATES BALANCE OF PAYMENTS CRISES PAYMENT SYSTEMS |
| Language: | eng |
| Abstract: | This paper analyzes the feasibility and optimality of raising interest rates to delay a potential BOP crisis. Interest rate policy works through two distinct channels. By raising demand for domestic, interest-bearing liquid assets, higher interest rates tend to delay the crisis. Higher interest rates, however, increase public debt service and imply higher future inflation, which tends to bring forward the crisis. The authors show that, under certain conditions, it is feasible to delay the crisis, but raising interest rates beyond a certain point may actually hasten the crisis. A similar nonmonotonic relationship emerges between welfare and the increase in interest rates. It is thus optimal to engage in some active interest rate defense but only up to a certain point. |
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