Currency Crises and Monetary Policy in an Economy with Credit Constraints
Abhijit Banerjee,
Philippe Bacchetta and
Philippe Aghion
Scholarly Articles from Harvard University Department of Economics
Abstract:
This paper presents a simple model of currency crises which is driven by the interplay between the credit constraints of private domestic firms and the existence of nominal price rigidities. The possibility of multiple equilibria, including a ‘currency crisis’ equilibrium with low output and a depreciated domestic currency, results from the following mechanism: If nominal prices are ‘sticky’, a currency depreciation leads to an increase in the foreign currency debt repayment obligations of firms, and thus to a fall in their profits; this reduces firms’ borrowing capacity and therefore investment and output in a credit-constrained economy, which in turn reduces the demand for the domestic currency and leads to a depreciation. We examine the impact of various shocks, including productivity, fiscal, or expectational shocks. We then analyze the optimal monetary policy to prevent or solve currency crises. We also argue that currency crises can occur both under fixed and flexible exchange rate regimes as the primary source of crises is the deteriorating balance sheet of private firms.
Date: 2001
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (361)
Published in European Economic Review
Downloads: (external link)
http://dash.harvard.edu/bitstream/handle/1/4554218/aghion_currencycrises.pdf (application/pdf)
Related works:
Journal Article: Currency crises and monetary policy in an economy with credit constraints (2001) 
Working Paper: Currency Crises and Monetary Policy in an Economy with Credit Constraints (2000) 
Working Paper: Currency Crises and Monetary Policy in an Economy with Credit Constraints (2000) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:hrv:faseco:4554218
Access Statistics for this paper
More papers in Scholarly Articles from Harvard University Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Office for Scholarly Communication ().