A simple model of monetary policy and currency crises
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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- Philippe Aghion & Abhijit Banerjee & Thomas Piketty, 1999.
"Dualism and Macroeconomic Volatility,"
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Center for International and Development Economics Research (CIDER) Working Papers
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- Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
- 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.
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