Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/82108
Authors: 
Bergman, U. Michael
Hassan, Shakill
Year of Publication: 
2008
Series/Report no.: 
EPRU Working Paper Series 2008-01
Abstract: 
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.
Subjects: 
currency crises
foreign–currency debt
balance sheets
interest parity
monetary policy
JEL: 
E51
F30
O11
Document Type: 
Working Paper

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