In this paper, I propose incomplete exchange rate pass-through as a new channel through which balance sheet effects can constrain monetary policy. I consider a New Keynesian open economy with external debt in foreign currency. I first show that absent heterogeneity within the country, outstanding external debt imposes no constraint on monetary policy under complete pass-through. If, however, pass-through is incomplete, then the expenditure switching benefits of a depreciation are weakened, while the strength of debt deflation is unchanged. As a result, sudden stops are contractionary, and prior current account deficits are inefficiently high due to aggregate demand externalities. Optimal macroprudential policy makes the private sector internalize the social value of future exchange rate flexibility. Absent perfect macroprudential tools, monetary policy would like to deter borrowing by promising a large, but time-inconsistent, depreciation during crises. I extend the model to capital flows within currency unions to show how the interaction of goods pricing and debt denomination slowly destroys the option value of exiting the union upon a crisis.