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Banks and Macroeconomics Disturbances under Predetermined Exchange Rates

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  • Sebastian Edwards
  • Carlos A. Vegh

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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5977.

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Date of creation: Mar 1997
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Publication status: published as Journal of Monetary Economics, Vol.40 (November 1997): 239-278.
Handle: RePEc:nbr:nberwo:5977

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