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Monetary policy, default risk and the exchange rate

Soares Gonçalves, Carlos Eduardo and Guimaraes, Bernardo (2007) Monetary policy, default risk and the exchange rate. 6501. Centre for Economic Policy Research, London, UK.

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Abstract

In a country with high probability of default, higher interest rates may render the currency less attractive if sovereign default is costly. This paper develops that intuition in a simple model and estimates the effect of changes in interest rates on the exchange rate in Brazil using data from the dates surrounding the monetary policy committee meetings and the methodology of identification through heteroskedasticity. Indeed, we find that unexpected increases in interest rates tend to lead the Brazilian currency to depreciate. It follows that granting more independence to a central bank that focus solely on inflation is not always a free-lunch.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.cepr.org
Additional Information: © 2007 Carlos Eduardo Soares Gonçalves and Bernardo Guimarães
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
F - International Economics > F3 - International Finance
Sets: Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Departments > Economics
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 6501
Date Deposited: 09 May 2008 09:16
URL: http://eprints.lse.ac.uk/4762/

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