Monetary Policy in Terms of Currency Crisis

This paper studies prospects of optimal monetary policy and presents a general equilibrium in currency crisis model of 'third generation'. Existence of possibility of the crisis is driven by connections between firms' credit constraints and nominal price rigidities. The model contains five main features: 1) PPP 2) credit constraints 3) foreign currency borrowing by domestic firms 4) a competitive banking sector lending to firms and holding reserves 5) benevolent central bank with long-run monetary police and intention not to cheat on its promises. Possibility of multiple equilibria in terms of exchange rate realization was derived, thus leading to conclusion, that under some conditions benevolent central bank will consciously not prevent the possibility of currency crisis. Connections between this decision and exogenous parameters of the model were also derived.