Currency crises and monetary policy in an economy with credit constraints

Details

Serval ID
serval:BIB_6CA90507D23B
Type
Article: article from journal or magazin.
Collection
Publications
Institution
Title
Currency crises and monetary policy in an economy with credit constraints
Journal
European Economic Review
Author(s)
Aghion P., Bacchetta P., Banerjee A.
ISSN
0014-2921
Publication state
Published
Issued date
06/2001
Peer-reviewed
Oui
Volume
45
Number
7
Pages
1121-1150
Language
english
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 analyse 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.
Keywords
Credit Constraint, Currency Crisis, Foreign Currency Debt, Economics and Econometrics, Finance
Web of science
Create date
19/11/2007 11:31
Last modification date
20/08/2019 15:26
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