TY - UNPB
T1 - Currency Crises and Monetary Policy in an Economy with Credit Constraints
T2 - The No Interest Parity Case
AU - Bergman, Ulf Michael
AU - Hassan, Shakill
N1 - JEL classification: E51, F30, O11
PY - 2008
Y1 - 2008
N2 - 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
AB - 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
KW - Faculty of Social Sciences
KW - foreign-currency debt
KW - balance sheets
M3 - Working paper
BT - Currency Crises and Monetary Policy in an Economy with Credit Constraints
PB - Economic Policy Research Unit. Department of Economics, University of Copenhagen
ER -