A corporate Balance-Sheet Approach to Currency Crises

Philippe Aghion, Philippe Bacchetta and Abhijit Banerjee

No 01.05, Working Papers from Swiss National Bank, Study Center Gerzensee

Abstract: The paper presents a general equilibrium currency crises model of the "third generation", in which the possibility of currency crises is driven by the interplay between private firms' credit-constraints and nominal price rigidities. Despite our emphasis on microfoundations, the model remains sufficiently simple that the policy analysis can be conducted graphically. The analysis hinges on two features: i) ex post deviations from purchasing power parity, ii) credit constraints a la Bernanke-Gertler, iii) foreign currency borrowing by domestic firms, iv) a competitive banking sector lending to firms and holding reserves and a monetary policy conducted either through open market operations or short-term lending facilities. We first show that with a positive likelihood of a currency crises, firms may indeed find it optimal to borrow in foreign currency, following Chamon (2001). Second, we derive sufficient conditions for the existence of sunspot equilibrium with currency crises. Third, we show that a reduction in the monetary base through restrictive open market operations is more likely to eliminate the poaaibility of currency crises if at the same time the central bank does not impose excessive constraints on short-term lending facilities.

Pages: 42 pages
Date: 2001-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (40)

Downloads: (external link)
http://www.szgerzensee.ch/fileadmin/Dateien_Anwend ... g_papers/wp-0105.pdf Full text (application/pdf)
None

Related works:
Journal Article: A corporate balance-sheet approach to currency crises (2004)
Working Paper: A Corporate Balance Sheet Approach to Currency Crises (2001)
Working Paper: A Corporate Balance-Sheet Approach to Currency Crises (2001)
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:szg:worpap:0105

Ordering information: This working paper can be ordered from
Studienzentrum Gerzensee, Postfach 21, 3115 Gerzensee

The price is Free.

Access Statistics for this paper

More papers in Working Papers from Swiss National Bank, Study Center Gerzensee Studienzentrum Gerzensee, Postfach 21, 3115 Gerzensee.
Bibliographic data for series maintained by library ().