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Monetary Policy with Foreign Currency Debt

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Abstract

A major feature characterizing recent currency crises in emerging markets has been the large proportion of private foreign currency debt. This feature has made the conduct of monetary policy particularly difficult. This paper proposes a simple model to better understand these issues where firms are credit constrained and the currency denomination of debt matters. I argue that the recent financial crises are well explained by such a model. In this framework, monetary policy can be ineffective since the interest rate and the exchange rate channels of transmission of monetary policy go in opposite directions. This potential ineffectiveness should be taken into account in the choice of a monetary or exchange rate regime.

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  • Philippe Bacchetta, 2000. "Monetary Policy with Foreign Currency Debt," Working Papers 00.03, Swiss National Bank, Study Center Gerzensee.
  • Handle: RePEc:szg:worpap:0003
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    Cited by:

    1. Katalin Bodnár, 2009. "Exchange rate exposure of Hungarian enterprises – results of a survey," MNB Occasional Papers 2009/80, Magyar Nemzeti Bank (Central Bank of Hungary).
    2. Vincent Bouvatier, 2004. "Crise de change et politique monétaire optimale dans un modèle de troisième génération : le rôle de la prime de risque," Cahiers de la Maison des Sciences Economiques bla04089, Université Panthéon-Sorbonne (Paris 1).
    3. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2004. "A corporate balance-sheet approach to currency crises," Journal of Economic Theory, Elsevier, vol. 119(1), pages 6-30, November.
    4. Olivier Jeanne & Charles Wyplosz, 2003. "The International Lender of Last Resort. How Large Is Large Enough?," NBER Chapters,in: Managing Currency Crises in Emerging Markets, pages 89-124 National Bureau of Economic Research, Inc.
    5. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December.
    6. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2001. "Currency crises and monetary policy in an economy with credit constraints," European Economic Review, Elsevier, vol. 45(7), pages 1121-1150.
    7. Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "¿Por qué los países tienen los regímenes de cambio flotante que tienen?," Research Department Publications 4206, Inter-American Development Bank, Research Department.
    8. repec:ebl:ecbull:v:6:y:2005:i:23:p:1-12 is not listed on IDEAS
    9. Jeronimo Zettelmeyer & Olivier D Jeanne, 2002. "“Original Sin,” Balance Sheet Crises, and the Roles of International Lending," IMF Working Papers 02/234, International Monetary Fund.

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