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Do High Interest Rates Defend Currencies During Speculative Attacks? New evidence Benedikt Goderis, CSAE, University of Oxford Vasso P. Ioannidou, Department of Finance & CentER, Tilburg University WPS/2006-11 Download the Paper (PDF format) - December 6, 2006 Tell a colleague about it. Printing Tips: Select 'print as image' in the Acrobat print dialog if you have trouble printing. ABSTRACT: A recent paper by Kraay (2003) documents the lack of any systematic association between monetary policy and the outcome of a speculative attack. This paper extends Kraay’s work by introducing an improved measure of monetary policy and an additional country-specific fundamental, short-term corporate debt, to capture balance sheet vulnerabilities emphasized by the recent currency crises literature. The results show that for low levels of short-term corporate debt, raising interest rates lowers the probability of a successful attack. This effect decreases and eventually reverses for higher levels of debt. These findings contrast earlier empirical evidence and imply a fundamental reconsideration of the role of monetary policy during currency crises. SUGGESTED CITATION: Benedikt Goderis and Vasso P. Ioannidou, "Do High Interest Rates Defend Currencies During Speculative Attacks? New evidence" (December 6, 2006). The Centre for the Study of African Economies Working Paper Series. Working Paper 255. http://www.bepress.com/csae/paper255