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A Simple Model of Monetary Pollicy and Currency Crises

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Author Info
Philippe Aghion (University College London, EBRD, and CEPR)
Philippe Bacchetta () (Studienzentrum Gerzensee, University of Lausanne, and CEPR)
Abhijit Banerjee (Massachussetts Institute of Technology)

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

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Publisher Info
Paper provided by Swiss National Bank, Study Center Gerzensee in its series Working Papers with number 99.05.

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Length: 13 pages
Date of creation: Sep 1999
Date of revision:
Handle: RePEc:szg:worpap:9905

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This page was last updated on 2009-11-20.

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