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