Currency crises, output costs and policy responses

This paper includes three chapters on currency crises, output costs and policy responses. Chapter one analyzes whether a high interest rate policy is effective in defending a country's currency during a speculative attack The empirical results suggest that a high interest rate policy might not be an effective way in defending currencies during speculative attacks. Chapter two investigates the effects of financial policies (monetary and fiscal) on output growth during an on-going sudden stop financial crisis (i.e. sudden stop in capital inflows) in developing economies. Once controlling for various pre-conditions and other factors, however, we find some evidence, albeit fragile, that the output costs of sudden stops are larger when the authorities pursue tight money policies. By contrast, changes in fiscal policy do not have a discernable effect on output losses during a sudden stop crisis. Chapter three investigates the nature of the causal relationship between sudden stops and output using the Granger causality test. Using a large sample of sudden stop episodes in 203 developed and developing countries during 1980-2003, our findings indicate that sudden stops Granger-cause the output drops.