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Central banks in emerging economies often respond to sharp depreciation pressure of the domestic currency (e rising), and market expectations of further sharp depreciation (e
Central banks in emerging economies often respond to sharp depreciation pressure of the domestic currency (e rising), and market expectations of further sharp depreciation (eE rising even more), by raising domestic interest rate. In many cases, this monetary policy tightening is implemented despite weakening in domestic economic conditions. Explain the rationale by using theories about foreign exchange rate in the short run (e.g. UIP, impossible Trinity, Mundell-Fleming model, etc.).
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