International Finance Discussion Papers (IFDP)
August 2005 (Revised May 2008)
Currency Crashes and Bond Yields in Industrial Countries
Joseph E. Gagnon
Abstract:
This paper examines episodes of sudden large exchange rate depreciations (currency crashes) in industrial countries and characterizes the behavior of government bond yields during and after these crashes. The most important determinant of changes in bond yields appears to be inflationary expectations. When inflation is high and rising at the time of a currency crash, bond yields tend to rise. Otherwise-and in every currency crash since 1985-bond yields tend to fall. Over the past 20 years, inflation rates have been remarkably stable in industrial countries after currency crashes.
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Keywords: Exchange rate, depreciation, interest rate, inflation
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