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A Macro Model of the Credit Channel in a Currency Union Member

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  • Issouf Samaké
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    Abstract

    This paper applies and extends a theoretical model built by Agénor and Montiel (2007) by exploring the effectiveness of government bonds and monetary policy in a small, open, credit-based economy with a fixed exchange rate. The model is applied to Benin, a member of a currency union, using a general equilibrium model with stochastic simulation. Model calibration replicates the historical pattern for 1996–2009. Policy experiments simulated an increase in government securities in Benin’s regional market and a cut in the reserve requirement. Simulations produced mixed results. It appears that, among other factors, excess bank liquidity lowers the effectiveness of monetary policy instruments through the credit channel and that government bonds can help mop up excess bank liquidity.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/191.

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    Length: 26
    Date of creation: 01 Aug 2010
    Date of revision:
    Handle: RePEc:imf:imfwpa:10/191

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    Related research

    Keywords: Benin; Excess liquidity; Central bank policy; Economic models; Financial sector; Monetary transmission mechanism; Sovereign debt; West African Economic and Monetary Union; bonds; reserve requirement; monetary policy; government bonds; central bank; monetary fund; reserve requirements; monetary transmission; inflation; financial services; government securities; financial market; financial markets; monetary authorities; transmission of monetary policy; issuance of bonds; money market; monetary union; discount rate; aggregate demand; high reserve requirement; bond; term bonds; financial systems; financial institutions; government bond; flexible exchange rates; monetary base; financial liberalization; long-term bonds; monetary policy instruments; bond rates; international financial statistics; central bank discount; nominal interest rate; rate bonds; financial system; deposit rate; crowding out; central bank reserve requirements;

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    Cited by:
    1. Primus, Keyra, 2013. "Excess Reserves, Monetary Policy and Financial Volatility," MPRA Paper 51670, University Library of Munich, Germany.

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