A Simple Model of Monetary Policy and Currency Crises

Philippe Aghion, Philippe Bacchetta and Abhijit Banerjee

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

Abstract: This paper analyzes the optimal interest rate policy in currency crises. Firms are credit constrained and have debt in domestic and foreign currency, a situation that may easily lead to a currency crisis. An interest rate increase has an ambiguous effect on firms since it both makes more difficult to borrow and may decrease the foreign currency debt burden. In some cases it is actually best to decrease the interest rate. We also show how these issues are related to development of the financial system.

Keywords: policy; foreign currency debt; currency crisis (search for similar items in EconPapers)
JEL-codes: E4 E5 F3 (search for similar items in EconPapers)
Pages: 10 pages
Date: 1999-09
New Economics Papers: this item is included in nep-ifn, nep-mon and nep-pke
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Citations: View citations in EconPapers (24)

Published in European Economic Review, Papers and Proceedings, vol. 44 (4-6), May 2000, pp. 728-738

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http://www.hec.unil.ch/deep/textes/9914.pdf (application/pdf)

Related works:
Journal Article: A simple model of monetary policy and currency crises (2000)
Working Paper: A Simple Model of Monetary Pollicy and Currency Crises (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:lau:crdeep:9914

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