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

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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

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  • FAS Scholarly Articles [7362]
    Peer reviewed scholarly articles from the Faculty of Arts and Sciences of Harvard University

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