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An Estimated Small Open Economy Model of the Financial Accelerator

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Author Info
Ivan Tchakarov
Selim Elekdag
Alejandro Justiniano

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Abstract

This paper develops a small open economy model where entrepreneurs partially finance investment using foreign currency denominated debt subject to a risk premium above and beyond international interest rates. We use Bayesian estimation techniques to evaluate the importance of balance sheet vulnerabilities combined with the presence of the financial accelerator for emerging market countries. Using Korean data, we obtain an estimate for the external risk premium, indicating the importance of the financial accelerator and potential balance sheet vulnerabilities for macroeconomic fluctuations. Furthermore, our estimates of the Taylor rule imply a strong preference to smooth both exchange rate and interest rate fluctuations.

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Publisher Info
Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/44.

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Length: 27 pages
Date of creation: 14 Mar 2005
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Handle: RePEc:imf:imfwpa:05/44

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Keywords: Financial sector Current account Exchange rates Savings Economic models

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2001. "Currency crises and monetary policy in an economy with credit constraints," European Economic Review, Elsevier, vol. 45(7), pages 1121-1150. [Downloadable!] (restricted)
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  2. Mark Gertler & Simon Gilchrist & Fabio Natalucci, 2003. "External Constraints on Monetary Policy and the Financial Accelerator," NBER Working Papers 10128, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Chari, V V & Kehoe, Patrick J & McGrattan, Ellen R, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Blackwell Publishing, vol. 69(3), pages 533-63, July.
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  4. Frank Schorfheide, 2000. "Loss function-based evaluation of DSGE models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(6), pages 645-670. [Downloadable!]
  5. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Thomas Lubik & Wing Leong Teo, 2005. "Do Terms of Trade Shocks Drive Business Cycles? Some Evidence from Structural Estimation," Computing in Economics and Finance 2005 377, Society for Computational Economics. [Downloadable!]
  2. Vasco Cúrdia, 2005. "Monetary Policy under Sudden Stops," International Finance 0510025, EconWPA, revised 02 Nov 2005. [Downloadable!]
    Other versions:
  3. Selim Elekdag & Alejandro Justiniano & Ivan Tchakarov, 2006. "An Estimated Small Open Economy Model of the Financial Accelerator," IMF Staff Papers, Palgrave Macmillan Journals, vol. 53(2), pages 2. [Downloadable!] (restricted)
  4. Ian Christensen & Ali Dib, 2008. "The Financial Accelerator in an Estimated New Keynesian Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 155-178, January. [Downloadable!] (restricted)
  5. Thomas Lubik & Wing Teo, 2005. "Do World Shocks Drive Domestic Business Cycles? Some Evidence from Structural Estimation," Economics Working Paper Archive 522, The Johns Hopkins University,Department of Economics. [Downloadable!]
  6. Ian Christensen & Ali Dib, 2006. "Monetary Policy in an Estimated DSGE Model with a Financial Accelerator," Working Papers 06-9, Bank of Canada. [Downloadable!]
    Other versions:
  7. Ivan Tchakarov & Selim Elekdag, 2006. "The Role of Interest Rates in Business Cycle Fluctuations in Emerging Market Countries: The Case of Thailand," IMF Working Papers 06/110, International Monetary Fund. [Downloadable!]
  8. Pierre-Richard Agénor & Peter J. Montiel, 2007. "Credit Market Imperfections and the Monetary Transmission Mechanism Part II: Flexible Exchange Rates," Centre for Growth and Business Cycle Research Discussion Paper Series 87, Economics, The Univeristy of Manchester. [Downloadable!]
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