Currency Crises and Monetary Policy in an Economy with Credit Constraints: The No Interest Parity Case

Arbeitspapier

This paper revisits the currency crises model of Aghion, Bacchetta and Banerjee (2000, 2001, 2004), who show that if there exist nominal price rigidities and private sector credit constraints, and the credit multiplier depends on real interest rates, then the optimal monetary policy response to the threat of a currency crisis is restrictive. We demonstrate that this result is primarily due to the uncovered interest parity assumption. Assuming that the exchange rate is a martingale restores the case for expansionary reaction - even with foreign-currency debt in firms' balance sheets. The effect of lower interest rates on output can help restore the value of the currency due to increased money demand.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: EPRU Working Paper Series ; No. 2008-01

Classification and Topics

• Classification: Wirtschaft ; Money Supply; Credit; Money Multipliers ; International Finance: General ; Macroeconomic Analyses of Economic Development
• Subject: currency crises ; foreign–currency debt ; balance sheets ; interest parity ; monetary policy ; Währungskrise ; Liquiditätsbeschränkung ; Zinsparität ; Geldpolitik ; Makroökonomik ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bergman, U. Michael ; Hassan, Shakill
• Event: Veröffentlichung
• (who): University of Copenhagen, Economic Policy Research Unit (EPRU)
• (where): Copenhagen
• (when): 2008

Further information

• Handle: http://hdl.handle.net/10419/82108
• Last update: 10.03.2025, 11:41 AM CET