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Interest Rate Defense against Speculative Attack as a Signal

Interest Rate Defense against Speculative Attack as a Signal

A Primer

Chapter:
(p.37) 2 Interest Rate Defense against Speculative Attack as a Signal
Source:
Managing Currency Crises in Emerging Markets
Author(s):
Allan Drazen
Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226155425.003.0004

This chapter deals with an interest rate defense against a speculative attack on a currency regime. It argues that a major effect of high interest rates is to signal the government's willingness or ability to defend the exchange rate against a potential crisis. It explores a class of models in which an interest rate defense alters the speculators' views of the type of government they face, introduces an alternative way of defending a currency system and considers the information an interest rate defense conveys about the ability of a government to defend.

Keywords:   interest rate, currency system, exchange rate, government, speculators

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