Advanced Search
MyIDEAS: Login

Household and firm leverage, capital flows and monetary policy in a small open economy

Contents:

Author Info

  • Mara Pirovano

    ()
    (University of Antwerp, Faculty of Applied Economics
    Catholic University of Leuven, Center of Economic Studies)

Abstract

This paper outlines a framework for analysing the interaction between financial frictions at the household and firm level, liability dollarization and optimal monetary policy in a small, open economy subject to productivity and capital inflow shocks. It is found that, first, for the shocks under review, the extent of co-movement of financial variables pertaining to entrepreneurs and homeowners crucially depends on the degree of exchange rate flexibility. Second, for a central bank not concerned with financial stability, reacting to inflation and output is considered optimal. Third, including financial stability in the central bank's objectives results in an optimal monetary policy rule reacting to exchange rate depreciation, but not to credit growth, even in the case of large capital inflow shocks. In fact, reacting to credit growth reinforces the initial shock, increasing financial imbalances.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nbb.be/doc/oc/repec/reswpp/wp246En.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bank of Belgium in its series Working Paper Research with number 246.

as in new window
Length: 42 pages
Date of creation: Nov 2013
Date of revision:
Handle: RePEc:nbb:reswpp:201311-246

Contact details of provider:
Postal: Boulevard de Berlaimont 14, B-1000 Bruxelles
Phone: (+ 32) (0) 2 221 25 34
Fax: (+ 32) (0) 2 221 31 62
Email:
Web page: http://www.nbb.be
More information through EDIRC

Related research

Keywords: DSGE model; capital inflows; financial frictions; liability dollarization; financial stability;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. Matteo Iacoviello & Stefano Neri, 2008. "Housing market spillovers : evidence from an estimated DSGE model," Working Paper Research 145, National Bank of Belgium.
  2. Luis Felipe Cespedes & Roberto Chang & Andres Velasco, 2000. "Balance Sheets and Exchange Rate Policy," NBER Working Papers 7840, National Bureau of Economic Research, Inc.
  3. F. Gulcin Ozkan & D. Filiz Unsal, 2012. "Global Financial Crisis, Financial Contagion, and Emerging Markets," IMF Working Papers 12/293, International Monetary Fund.
  4. Donald L. Kohn, 2006. "Monetary policy and asset prices: a speech at “Monetary Policy: a Journey from Theory to Practice,” a European Central Bank Colloquium held in honor of Otmar Issing, Frankfurt, Germany, March 16, ," Speech 174, Board of Governors of the Federal Reserve System (U.S.).
  5. Brzoza-Brzezina, Michał & Kolasa, Marcin & Makarski, Krzysztof, 2013. "The anatomy of standard DSGE models with financial frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 32-51.
  6. Gergely Kiss & Márton Nagy & Balázs Vonnák, 2006. "Credit Growth in Central and Eastern Europe: Convergence or Boom?," MNB Working Papers 2006/10, Magyar Nemzeti Bank (the central bank of Hungary).
  7. D. Filiz Unsal, 2013. "Capital Flows and Financial Stability: Monetary Policy and Macroprudential Responses," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 233-285, March.
  8. Morris A. Davis & Jonathan Heathcote, 2005. "Housing And The Business Cycle," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(3), pages 751-784, 08.
  9. Romain Ranciere & Aaron Tornell & Athanasios Vamvakidis, 2010. "Currency mismatch, systemic risk and growth in emerging Europe," Economic Policy, CEPR & CES & MSH, vol. 25, pages 597-658, October.
  10. Matteo Iacoviello, 2002. "House prices, borrowing constraints and monetary policy in the business cycle," Boston College Working Papers in Economics 542, Boston College Department of Economics, revised 06 Dec 2004.
  11. Chiara Forlati & Luisa Lambertini, 2010. "Risky Mortgages in a DSGE Model," Working Papers 201002, Center for Fiscal Policy, Swiss Federal Institute of Technology Lausanne, revised Nov 2010.
  12. Alejandro Justiniano & Selim Elekdag & Ivan Tchakarov, 2005. "An Estimated Small Open Economy Model of the Financial Accelerator," IMF Working Papers 05/44, International Monetary Fund.
  13. Solomon, Bernard Daniel, 2010. "Firm leverage, household leverage and the business cycle," MPRA Paper 26504, University Library of Munich, Germany.
  14. Mark Gertler & Simon Gilchrist & Fabio M. Natalucci, 2007. "External Constraints on Monetary Policy and the Financial Accelerator," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 295-330, 03.
  15. Vasco Cúrdia, 2008. "Optimal monetary policy under sudden stops," Staff Reports 323, Federal Reserve Bank of New York.
  16. Nicoletta Batini & Paul Levine & Joseph Pearlman, 2007. "Monetary Rules in Emerging Economies with Financial Market Imperfections," NBER Chapters, in: International Dimensions of Monetary Policy, pages 251-311 National Bureau of Economic Research, Inc.
  17. César Calderón & Rodrigo Fuentes., 2011. "Characterizing the Business Cycles of Emerging Economies," Documentos de Trabajo 371, Instituto de Economia. Pontificia Universidad Católica de Chile..
  18. Kannan Prakash & Rabanal Pau & Scott Alasdair M., 2012. "Monetary and Macroprudential Policy Rules in a Model with House Price Booms," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-44, June.
  19. Michael B. Devereux & Philip R. Lane & Juanyi Xu, 2006. "Exchange Rates and Monetary Policy in Emerging Market Economies," Economic Journal, Royal Economic Society, vol. 116(511), pages 478-506, 04.
  20. Paolo Gelain & Dmitry Kulikov, 2009. "An estimated dynamic stochastic general equilibrium model for Estonia," Bank of Estonia Working Papers 2009-5, Bank of Estonia, revised 30 Dec 2009.
  21. Banerjee, Abhijit & Bacchetta, Philippe & Aghion, Philippe, 2001. "Currency Crises and Monetary Policy in an Economy with Credit Constraints," Scholarly Articles 4554218, Harvard University Department of Economics.
  22. Olivier Jeanne & Michael D. Bordo, 2002. "Monetary Policy and Asset Prices," IMF Working Papers 02/225, International Monetary Fund.
  23. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  24. Vasco Cúrdia, 2007. "Monetary policy under sudden stops," Staff Reports 278, Federal Reserve Bank of New York.
  25. William R. White, 2009. "Should monetary policy "lean or clean"?," Globalization and Monetary Policy Institute Working Paper 34, Federal Reserve Bank of Dallas.
  26. Gunes Kamber & Christoph Thoenissen, 2011. "Financial intermediation and the international business cycle: The case of small countries with big banks," CDMA Working Paper Series 201108, Centre for Dynamic Macroeconomic Analysis.
  27. Vasco Cúrdia & Michael Woodford, 2009. "Credit Spreads and Monetary Policy," Discussion Papers 0910-01, Columbia University, Department of Economics.
  28. De Fiore, Fiorella & Tristani, Oreste, 2009. "Optimal monetary policy in a model of the credit channel," Working Paper Series 1043, European Central Bank.
  29. Bordo, Michael D & Jeanne, Olivier, 2002. "Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense?," International Finance, Wiley Blackwell, vol. 5(2), pages 139-64, Summer.
  30. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December.
  31. Ester Faia & Tommaso Monacelli, 2005. "Optimal Monetary Policy Rules, Asset Prices and Credit Frictions," Working Papers 279, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  32. Pritha Mitra, 2011. "Capital Flows to EU New Member States," IMF Working Papers 11/67, International Monetary Fund.
  33. 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.
  34. Marcin Kolasa & Giovanni Lombardo, 2011. "Financial frictions and optimal monetary policy in an open economy," National Bank of Poland Working Papers 91, National Bank of Poland, Economic Institute.
  35. Ester Faia, 2010. "Financial Frictions And The Choice Of Exchange Rate Regimes," Economic Inquiry, Western Economic Association International, vol. 48(4), pages 965-982, October.
  36. Ian Christensen & Paul Corrigan & Caterina Mendicino & Shin-Ichi Nishiyama, 2009. "Consumption, Housing Collateral, and the Canadian Business Cycle," Working Papers 09-26, Bank of Canada.
  37. Michael Woodford, 2012. "Inflation Targeting and Financial Stability," NBER Working Papers 17967, National Bureau of Economic Research, Inc.
  38. Angeloni, Ignazio & Faia, Ester, 2013. "Capital regulation and monetary policy with fragile banks," Journal of Monetary Economics, Elsevier, vol. 60(3), pages 311-324.
  39. Sirtaine, Sophie & Skamnelos, Ilias, 2007. "Credit growth in emerging Europe : a cause for stability concerns?," Policy Research Working Paper Series 4281, The World Bank.
  40. Tommaso Monacelli, 2003. "Monetary Policy in a Low Pass-Through Environment," Working Papers 228, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  41. Roland Straub & Günter Coenen, 2005. "Non-Ricardian Households and Fiscal Policy in an Estimated DSGE Model of the Euro Area," Computing in Economics and Finance 2005 102, Society for Computational Economics.
  42. Brzoza-Brzezina, Michal & Makarski, Krzysztof, 2009. "Credit Crunch in a Small Open Economy," MPRA Paper 18595, University Library of Munich, Germany.
  43. Darracq Pariès, Matthieu & Notarpietro, Alessandro, 2008. "Monetary policy and housing prices in an estimated DSGE for the US and the euro area," Working Paper Series 0972, European Central Bank.
  44. John Moore & Nobuhiro Kiyotaki, . "Credit Cycles," Discussion Papers 1995-5, Edinburgh School of Economics, University of Edinburgh.
  45. Merola, Rossana, 2010. "Optimal monetary policy in a small open economy with financial frictions," Discussion Paper Series 1: Economic Studies 2010,01, Deutsche Bundesbank, Research Centre.
  46. Piti Disyatat, 2005. "Inflation Targeting, Asset Prices, and Financial Imbalances: Conceptualizing the Debate," Working Papers 2005-09, Economic Research Department, Bank of Thailand.
  47. James B. Bullard & Eric Schaling, 2002. "Why the Fed should ignore the stock market," Review, Federal Reserve Bank of St. Louis, issue Mar., pages 35-42.
  48. Viktors Ajevskis & Kristine Vitola, 2011. "Housing and Banking in a Small Open Economy DSGE Model," Working Papers 2011/03, Latvijas Banka.
  49. Paolo Gelain & Dmitry Kulikov, 2011. "An Estimated Dynamic Stochastic General Equilibrium Model with Financial Frictions for Estonia," Eastern European Economics, M.E. Sharpe, Inc., vol. 49(5), pages 97-120, September.
  50. Ben S. Bernanke & Mark Gertler, 2001. "Should Central Banks Respond to Movements in Asset Prices?," American Economic Review, American Economic Association, vol. 91(2), pages 253-257, May.
  51. International Monetary Fund, 2010. "The Credit Boom in the EU New Member States," IMF Working Papers 10/130, International Monetary Fund.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbb:reswpp:201311-246. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.