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A Simple Model of Monetary Policy and Currency Crises

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Author Info
Philippe AGHION
Philippe BACCHETTA
Abhijit BANERJEE

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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.

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Publisher Info
Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 9914.

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Length: 10 pages
Date of creation: Sep 1999
Date of revision:
Publication status: Published in European Economic Review, Papers and Proceedings, vol. 44 (4-6), May 2000, pp. 728-738
Handle: RePEc:lau:crdeep:9914

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Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.65
Web page: http://www.hec.unil.ch/deep/publications-english/e-cahiers.htm

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Related research
Keywords: policy; foreign currency debt; currency crisis;

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Find related papers by JEL classification:
E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
F3 - International Economics - - International Finance

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This page was last updated on 2009-10-26.

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