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Credit Market Imperfections and the Monetary Transmission Mechanism Part II: Flexible Exchange Rates

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  • Pierre-Richard Agénor
  • Peter J. Montiel

Abstract

Monetary policy is analyzed in a simple model with credit market imperfections, flexible prices, and a floating exchange rate. Banks’ lending rates incorporate a premium, which depends on firms’ net worth, over the cost of borrowing from the central bank. In contrast to models in the Kiyotaki-Moore tradition, the supply of bank loans is perfectly elastic at the prevailing lending rate. The central bank sets the refinance rate and provides banks with unlimited access to liquidity at that rate. The model is used to study the macroeconomic effects of changes in the refinance and reserve requirement rates, central bank auctions, shifts in the risk premium and contract enforcement costs, and changes in public spending and world interest rates.

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File URL: http://www.socialsciences.manchester.ac.uk/medialibrary/cgbcr/discussionpapers/dpcgbcr87.pdf
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Bibliographic Info

Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 87.

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Length: 35 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:man:cgbcrp:87

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  1. Chowdhury, Ibrahim & Hoffmann, Mathias & Schabert, Andreas, 2004. "Inflation dynamics and the cost channel of monetary transmission," CFR Working Papers 04-01, University of Cologne, Centre for Financial Research (CFR).
  2. Kato, Ryo, 2006. "Liquidity, infinite horizons and macroeconomic fluctuations," European Economic Review, Elsevier, vol. 50(5), pages 1105-1130, July.
  3. Carl E. Walsh, 2002. "Teaching Inflation Targeting: An Analysis for Intermediate Macro," The Journal of Economic Education, Taylor & Francis Journals, vol. 33(4), pages 333-346, December.
  4. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
  5. Camilo E Tovar, 2005. "The mechanics of devaluations and the output response in a DSGE model: how relevant is the balance sheet effect?," BIS Working Papers 192, Bank for International Settlements.
  6. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, December.
  7. Pierre-Richard Agénor & Peter J. Montiel, 2006. "Credit Market Imperfections and the Monetary Transmission Mechanism Part I: Fixed Exchange Rates," Centre for Growth and Business Cycle Research Discussion Paper Series 76, Economics, The Univeristy of Manchester.
  8. Thomas Cooley & Vincenzo Quadrini, 2006. "Monetary policy and the financial decisions of firms," Economic Theory, Springer, vol. 27(1), pages 243-270, 01.
  9. Kumar Das, Pranab, 2004. "Credit rationing and firms' investment and production decisions," International Review of Economics & Finance, Elsevier, vol. 13(1), pages 87-114.
  10. David D. VanHoose, 2004. "The New Open Economy Macroeconomics: A Critical Appraisal," Open Economies Review, Springer, vol. 15(2), pages 193-215, 04.
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Cited by:
  1. Koray Alper, 2007. "Monetary Policy and External Shocks in a Dollarized Economy with Credit Market Imperfections," Centre for Growth and Business Cycle Research Discussion Paper Series 93, Economics, The Univeristy of Manchester.

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