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A Simple Model of Monetary Policy and Currency Crises

Author

Listed:
  • Philippe AGHION
  • Philippe BACCHETTA
  • Abhijit BANERJEE

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.

Suggested Citation

  • Philippe AGHION & Philippe BACCHETTA & Abhijit BANERJEE, 1999. "A Simple Model of Monetary Policy and Currency Crises," Cahiers de Recherches Economiques du Département d'économie 9914, Université de Lausanne, Faculté des HEC, Département d’économie.
    • Handle: RePEc:lau:crdeep:9914
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    References listed on IDEAS

    as
    1. Philippe Aghion & Abhijit Banerjee & Thomas Piketty, 1999. "Dualism and Macroeconomic Volatility," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(4), pages 1359-1397.
    2. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-660, June.
    3. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 393-414.
    4. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    policy; foreign currency debt; currency crisis;
    All these keywords.

    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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