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Monetary Policy and External Shocks in a Dollarized Economy with Credit Market Imperfections

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  • Koray Alper

Abstract

This paper analyses the transmission of monetary and external shocks in a dollarized economy by making use of a small, static analytical model, which dwells on Agénor and Montiel (2006, 2007). The focus is particularly on the implications of endogenous country risk premium on the transmission of shocks. Endogenous risk premium arises from the imperfect information in international capital markets. As is the case for literature on credit market imperfections, net worth of the banks intermediating between the domestic investors and international capital markets, is the main determinant of country´s risk premium. Fluctuations in the exchange rate a¤ect the net worth of the banks and so the cost of foreign resources which is, in turn, reflected into domestic lending rates. We show that the conventional effects of monetary and external shocks might be reversed in such a setting.

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Paper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 0707.

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Date of creation: 2007
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Handle: RePEc:tcb:wpaper:0707

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  1. Kato, Ryo, 2006. "Liquidity, infinite horizons and macroeconomic fluctuations," European Economic Review, Elsevier, Elsevier, vol. 50(5), pages 1105-1130, July.
  2. Luis Felipe Céspedes & Roberto Chang & Andrés Velasco, 2004. "Balance Sheets and Exchange Rate Policy," American Economic Review, American Economic Association, American Economic Association, vol. 94(4), pages 1183-1193, September.
  3. Eugenio Gaiotti & Alessandro Secchi, 2004. "Is there a cost channel of monetary policy transmission? An investigation into the pricing behavior of 2,000 firms," Macroeconomics, EconWPA 0412010, EconWPA.
  4. Ibrahim Chowdhury & Mathias Hoffmann & Andreas Schabert, 2004. "Inflation Dynamics And The Cost Channel Of Monetary Transmission," Royal Economic Society Annual Conference 2004, Royal Economic Society 80, Royal Economic Society.
  5. Choi, Woon Gyu & Cook, David, 2004. "Liability dollarization and the bank balance sheet channel," Journal of International Economics, Elsevier, Elsevier, vol. 64(2), pages 247-275, December.
  6. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc.
  7. Barth, Marvin J III & Ramey, Valerie A, 2000. "The Cost Channel of Monetary Transmissions," University of California at San Diego, Economics Working Paper Series, Department of Economics, UC San Diego qt7rm5q9sk, Department of Economics, UC San Diego.
  8. Ravenna, Federico & Walsh, Carl E., 2006. "Optimal monetary policy with the cost channel," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(2), pages 199-216, March.
  9. Bruckner, Matthias & Schabert, Andreas, 2003. "Supply-side effects of monetary policy and equilibrium multiplicity," Economics Letters, Elsevier, Elsevier, vol. 79(2), pages 205-211, May.
  10. Pierre-Richard Agénor & Peter J. Montiel, 2006. "Credit Market Imperfections and the Monetary Transmission Mechanism Part I: Fixed Exchange Rates," The School of Economics Discussion Paper Series, Economics, The University of Manchester 0628, Economics, The University of Manchester.
  11. Pierre-Richard Ag�Nor, 2006. "Market Sentiment and Macroeconomic Fluctuations under Pegged Exchange Rates," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 73(292), pages 579-604, November.
  12. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 1999. "A Simple Model of Monetary Pollicy and Currency Crises," Working Papers, Swiss National Bank, Study Center Gerzensee 99.05, Swiss National Bank, Study Center Gerzensee.
  13. van Wijnbergen, S., 1982. "Stagflationary effects of monetary stabilization policies : A quantitative analysis of South Korea," Journal of Development Economics, Elsevier, Elsevier, vol. 10(2), pages 133-169, April.
  14. 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, Economics, The Univeristy of Manchester 87, Economics, The Univeristy of Manchester.
  15. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer, Springer, vol. 6(4), pages 459-472, November.
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Cited by:
  1. Pierre-Richard Agénor & Peter Montiel, 2008. "Monetary Policy Analysis in a Small Open Credit-Based Economy," Open Economies Review, Springer, Springer, vol. 19(4), pages 423-455, September.

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