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Do Fixed Exchange Rates Fetter Monetary Policy? A Credit View

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  • Burton A. Abrams

    (University of Delaware)

  • Russell F. Settle

    (Western Washington University)

Abstract

The Bernanke-Blinder credit-view model is expanded to encompass a small, open economy with fixed exchange rates. In contrast to conventional wisdom and traditional models, monetary policy is resurrected as a stabilization tool. We show that various financial sector shocks have real aggregate demand effects. Further, we demonstrate that independent monetary policy actions can have substantive impacts on aggregate demand despite perfect capital mobility in bond markets and adherence to a fixed exchange rate regime as long as bank loans are imperfectly mobile.

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File URL: http://college.holycross.edu/RePEc/eej/Archive/Volume33/V33N2P193_205.pdf
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Bibliographic Info

Article provided by Eastern Economic Association in its journal Eastern Economic Journal.

Volume (Year): 33 (2007)
Issue (Month): 2 (Spring)
Pages: 193-205

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Handle: RePEc:eej:eeconj:v:33:y:2007:i:2:p:193-205

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  1. Ben S. Bernanke, 1983. "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression," NBER Working Papers 1054, National Bureau of Economic Research, Inc.
  2. Gertler, Mark, 1988. "Financial Structure and Aggregate Economic Activity: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 20(3), pages 559-88, August.
  3. Thomas F. Cosimano & Ralph Chami & Adolfo Barajas, 2005. "Did the Basel Accord Cause a Credit Slowdown in Latin America?," IMF Working Papers, International Monetary Fund 05/38, International Monetary Fund.
  4. Ben S. Bernanke & Alan S. Blinder, 1988. "Credit, Money, and Aggregate Demand," NBER Working Papers 2534, National Bureau of Economic Research, Inc.
  5. John C. Driscoll, 2003. "Does bank lending affect output? evidence from the U.S. states," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2003-31, Board of Governors of the Federal Reserve System (U.S.).
  6. Alicia García-Herrero, 1997. "Monetary Impact of a Banking Crisis and the Conduct of Monetary Policy," IMF Working Papers, International Monetary Fund 97/124, International Monetary Fund.
  7. Shatz, Howard J. & Tarr, David G., 2000. "Exchange rate overvaluation and trade protection - lessons from experience," Policy Research Working Paper Series 2289, The World Bank.
  8. L. Wade, 1988. "Review," Public Choice, Springer, Springer, vol. 58(1), pages 99-100, July.
  9. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  10. R. Glenn Hubbard, 1997. "Capital-Market Imperfections and Investment," NBER Working Papers 5996, National Bureau of Economic Research, Inc.
  11. Volker Treichel, 1997. "Broad Money Demand and Monetary Policy in Tunisia," IMF Working Papers, International Monetary Fund 97/22, International Monetary Fund.
  12. Cuevas, Mario A., 2002. "Money demand in Venezuela : multiple cycle extraction in a cointegration frmaework," Policy Research Working Paper Series 2844, The World Bank.
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