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Monetary Policy Analysis in a Small Open Credit-Based Economy

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  • Pierre-Richard Agénor

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  • Peter Montiel

Abstract

This paper describes a simple framework for monetary policy analysis in a small open economy where bank credit is 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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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 19 (2008)
Issue (Month): 4 (September)
Pages: 423-455

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Handle: RePEc:kap:openec:v:19:y:2008:i:4:p:423-455

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: Monetary policy; Credit market imperfections; Small open economy; E44; E51; F41;

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References

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Citations

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Cited by:
  1. Agenor, Pierre-Richard & Pereira da Silva, Luiz A., 2009. "Cyclical effects of bank capital requirements with imperfect credit markets," Policy Research Working Paper Series 5067, The World Bank.
  2. Agénor, P.-R. & Alper, K. & Pereira da Silva, L., 2009. "Capital requirements and business cycles with credit market imperfections," Policy Research Working Paper Series 5151, The World Bank.
  3. Primus, Keyra, 2013. "Excess Reserves, Monetary Policy and Financial Volatility," MPRA Paper 51670, University Library of Munich, Germany.
  4. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2013. "Inflation Targeting and Financial Stability: A Perspective from the Developing World," Working Papers Series, Central Bank of Brazil, Research Department 324, Central Bank of Brazil, Research Department.
  5. Pierre-Richard Agénor & Karim El Aynaoui, 2008. "Excess Liquidity, Bank Pricing Rules, and Monetary Policy," Centre for Growth and Business Cycle Research Discussion Paper Series 105, Economics, The Univeristy of Manchester.
  6. Agenor, Pierre-Richard & Bayraktar, Nihal, 2003. "Contracting models of the Phillips curve - empirical estimates for Middle-income countries," Policy Research Working Paper Series 3139, The World Bank.
  7. Malikane, Christopher, 2012. "Inflation dynamics and the cost channel in emerging markets," MPRA Paper 42688, University Library of Munich, Germany.

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