A simple model of monetary policy and currency crises

This paper analyzes the optimal interest rate policy in currency crises, Fi rms are credit constrained and have debt in domestic and foreign currency, a situation that may easily lead to a currency crisis. An interest rate inc rease has an ambiguous effect on firms since it makes more difficult to bor row and may decrease the foreign currency debt burden. In some cases it is actually best to decrease the interest rate. We also show how these issues are related to the development of the financial system. (C) 2000 Elsevier S cience B.V. All rights reserved. JEL classification: E4; E5; F3.