Currency Crises and Monetary Policy in an Economy with Credit Constraints

Currency Crises and Monetary Policy in an Economy with Credit Constraints

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Currency Crises and Monetary Policy in an Economy with Credit Constraints

dc.contributor.author	Banerjee, Abhijit
dc.contributor.author	Bacchetta, Philippe
dc.contributor.author	Aghion, Philippe
dc.date.accessioned	2010-11-15T15:35:57Z
dc.date.issued	2001
dc.identifier.citation	Aghion, Philippe, Philippe Bacchetta, and Abhijit Banerjee. 2001. Currency crises and monetary policy in an economy with credit constraints. European Economic Review 45(7): 1121-1150.	en_US
dc.identifier.issn	0014-2921	en_US
dc.identifier.uri	http://nrs.harvard.edu/urn-3:HUL.InstRepos:4554218
dc.description.abstract	This paper presents a simple model of currency crises which is driven by the interplay between the credit constraints of private domestic firms and the existence of nominal price rigidities. The possibility of multiple equilibria, including a ‘currency crisis’ equilibrium with low output and a depreciated domestic currency, results from the following mechanism: If nominal prices are ‘sticky’, a currency depreciation leads to an increase in the foreign currency debt repayment obligations of firms, and thus to a fall in their profits; this reduces firms’ borrowing capacity and therefore investment and output in a credit-constrained economy, which in turn reduces the demand for the domestic currency and leads to a depreciation. We examine the impact of various shocks, including productivity, fiscal, or expectational shocks. We then analyze the optimal monetary policy to prevent or solve currency crises. We also argue that currency crises can occur both under fixed and flexible exchange rate regimes as the primary source of crises is the deteriorating balance sheet of private firms.	en_US
dc.description.sponsorship	Economics	en_US
dc.language.iso	en_US	en_US
dc.publisher	Elsevier	en_US
dc.relation.isversionof	doi:10.1016/S0014-2921(00)00100-8	en_US
dash.license	LAA
dc.subject	monetary policy	en_US
dc.subject	foreign currency debt	en_US
dc.subject	currency crisis	en_US
dc.title	Currency Crises and Monetary Policy in an Economy with Credit Constraints	en_US
dc.type	Journal Article	en_US
dc.description.version	Accepted Manuscript	en_US
dc.relation.journal	European Economic Review	en_US
dash.depositing.author	Aghion, Philippe
dc.date.available	2010-11-15T15:35:57Z