A Simple Model of Monetary Pollicy and Currency Crises

Philippe Aghion, Philippe Bacchetta and Abhijit Banerjee

No 99.05, Working Papers from Swiss National Bank, Study Center Gerzensee

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 decrase the interest rate. We also show how these issues are related to the development of the financial system.

Pages: 13 pages
Date: 1999-09
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Related works:
Journal Article: A simple model of monetary policy and currency crises (2000)
Working Paper: A Simple Model of Monetary Policy and Currency Crises (1999)
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