Monetary Policy Analysis in a Small Open Credit-Based Economy |
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Authors: | Pierre-Richard Agénor Peter J Montiel |
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Institution: | (1) Centre for Growth and Business Cycle Research, University of Manchester, Manchester, UK;(2) Williams College, Williamstown, MA, USA |
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Abstract: | This paper describes a simple framework for monetary policy analysis in a small open economy where bank credit is the only
source of external finance. At the heart of the model is the link between banks’ lending rates (which incorporate a premium
over and above the marginal cost of borrowing) and firms’ net worth. In contrast to models in the Stiglitz-Weiss or Kiyotaki-Moore
tradition, the supply of bank loans is perfectly elastic at the prevailing rate. The central bank sets the refinance rate
and provides unlimited access to liquidity at that rate. The model is used to study the effects of changes in official interest
rates, under both fixed and flexible exchange rates. Various extensions are also discussed, including income effects, the
cost channel, the role of land as collateral, and dollarization.
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Keywords: | Monetary policy Credit market imperfections Small open economy |
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