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An Estimated Small Open Economy Model of the Financial Accelerator

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  • Selim Elekdag

    (International Monetary Fund)

  • Alejandro Justiniano

    (International Monetary Fund)

  • Ivan Tchakarov

    (International Monetary Fund)

Abstract

This paper develops a small open economy model in which entrepreneurs partially finance investment using foreign currency-denominated debt subject to an external finance premium. We use Bayesian estimation techniques to evaluate the importance of balance sheet-related credit market frictions for emerging market countries by incorporating the financial accelerator mechanism. We obtain a sizable value for the external finance premium, which is tightly estimated away from zero. Our results support the inclusion of the financial accelerator in an otherwise standard model that-acting through balance sheets-magnifies the impact of shocks, thereby increasing real and financial volatility. Copyright 2006, International Monetary Fund

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal IMF Staff Papers.

Volume (Year): 53 (2006)
Issue (Month): 2 ()
Pages: 2

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Handle: RePEc:pal:imfstp:v:53:y:2006:i:2:p:2

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  1. Christopher A. Sims & Tao Zha, 2006. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, American Economic Association, American Economic Association, vol. 96(1), pages 54-81, March.
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  9. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers, C.V. Starr Center for Applied Economics, New York University 98-03, C.V. Starr Center for Applied Economics, New York University.
  10. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2001. "Currency crises and monetary policy in an economy with credit constraints," European Economic Review, Elsevier, Elsevier, vol. 45(7), pages 1121-1150.
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  13. Kollmann, Robert, 2002. "Monetary Policy Rules in the Open Economy: Effects on Welfare and Business Cycles," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3279, C.E.P.R. Discussion Papers.
  14. Elekdag, Selim & Tchakarov, Ivan, 2007. "Balance sheets, exchange rate policy, and welfare," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 31(12), pages 3986-4015, December.
  15. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
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