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Banks and Macroeconomic Disturbances Under Predetermined Exchange Rates

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  • Sebastian Edwards
  • Carlos A. Végh

Abstract

As the recent Mexican crisis vividly illustrates, Latin American countries often go through boom-bust cycles caused by both domestic policies and external shocks. Such cycles are typically magnified by weak banking systems which intermediate large capital inflows. This paper develops a simple optimizing model to analyze how the banking sector affects the propagation of shocks. In particular, we show how the world business cycle and shocks to the banking system affect output and employment through fluctuations in bank credit. We also analyze the countercyclical use of reserve requirements. Econometric evidence for Chile and Mexico supports the main predictions of the model.

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Bibliographic Info

Paper provided by Universidad del CEMA in its series CEMA Working Papers: Serie Documentos de Trabajo. with number 115.

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Date of creation: Mar 1997
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Handle: RePEc:cem:doctra:115

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