Abstract

Monetary policy in the Asian crisis programs faced a difficult task of balancing two objectives. On the one side was the desire to avoid a depreciation-inflation spiral. During the crisis, exchange rates initially depreciated far beyond real levels consistent with the medium-term fundamentals; had monetary policy fully accommodated these depreciations, the new exchange rates would eventually have been validated by inflation. It could not be taken for granted that these countries' track records of relatively low inflation would be an adequate anchor for market expectations. On the other side were concerns that excessive monetary tightening could severely weaken economic activity.

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