This paper examines the movements of exchange rates and capital inflows in an environment where an optimizing central bank pursuing the joint goals of inflation and output targeting engages in costly sterilization activities. Our results predict that when faced with increased sterilization...

While virtually all modern currency crisis models recognise that the decision to abandon an exchange rate peg depends on how tenaciously policy makers are willing to defend it, they seldom model how this is done. We incorporate both the mechanics of speculation and of a defence policy against...

Persistent interest rate differentials account for much of the currency carry trade profitability. "Commodity currencies" offer high interest rates on average, while countries that export finished goods tend to have low interest rates. We develop a general equilibrium model of international...

Persistent differences in interest rates across countries account for much of the profitability of currency carry trade strategies. "Commodity currencies'' tend to have high interest rates while low interest rate currencies belong to exporters of finished goods. This pattern arises in a...