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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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  4. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1993. "“Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," MPRA Paper 7125, University Library of Munich, Germany.
  5. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
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  8. Amartya Lahiri, 1996. "Exchange Rate Based Stabilizations Under Real Frictions: The role of endagenous labor supply," UCLA Economics Working Papers 759, UCLA Department of Economics.
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  26. Leonardo Leiderman & Carmen Reinhart & Guillermo Calvo, 1992. "Capital Inflows and Real Exchange Rate Appreciation in Latin America," IMF Working Papers 92/62, International Monetary Fund.
  27. Fischer, Stanley, 1983. "A Framework for Monetary and Banking Analysis," Economic Journal, Royal Economic Society, vol. 93(369a), pages 1-16, Supplemen.
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