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Evidence for a financial accelerator in a small open economy, and implications for monetary policy

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  • MARTHA LÓPEZ

  • JUAN DAVID PRADA

  • NORBERTO RODRÍGUEZ

Abstract

Using Bayesian estimation techniques, we estimate a small open economy dynamic stochastic general equilibrium model with credit-market imperfections for the Colombian economy. We show that the combination of balance sheet effects and the choice of monetary policy regime are likely to play an important role in the magnification and propagation of initial shocks to the Colombian economy. As an application we show that our model explains the 1998-1999 crisis in Colombia, when a sharp rise in spreads on a relatively small proportion of international debt were passed strongly onto domestic lending rates, provoking a severe recession.

Suggested Citation

  • Martha López & Juan David Prada & Norberto Rodríguez, 2009. "Evidence for a financial accelerator in a small open economy, and implications for monetary policy," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 27(60), pages 12-45, December.
    • Handle: RePEc:bdr:ensayo:v:27:y:2009:i:60:p:12-45
    DOI: 10.32468/Espe.6001
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    References listed on IDEAS

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    1. Ben S. Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Economic Review, Federal Reserve Bank of Kansas City, vol. 84(Q IV), pages 17-51.
    2. repec:tep:teppwp:wp1215 is not listed on IDEAS
    3. N/A, 2002. "Documents," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 3(2), pages 336-337, September.
    4. N/A, 2002. "Documents," South Asian Survey, , vol. 9(2), pages 287-304, September.
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    Citations

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    Cited by:

    1. Andrés González & Lavan Mahadeva & Juan D. Prada & Diego Rodríguez, 2011. "Policy Analysis Tool Applied to Colombian Needs: Patacon Model Description," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 29(66), pages 222-245, December.
    2. Martha López, 2016. "Fiscal Multipliers, Oil Revenues and Balance Sheet Effects," Borradores de Economia 976, Banco de la Republica de Colombia.
    3. Martha López Pineros, 2020. "Fiscal Multipliers and Balance Sheet Effects in a Small Open Economy," Revista de Economía del Rosario, Universidad del Rosario, vol. 23(2), pages 1-42.
    4. Martha López, 2015. "Asset price bubbles and monetary policy in a small open economy," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 33(77), pages 93-102, June.
    5. Martha López & Fernando Tenjo & Hector Z�rate, 2014. "Credit Cycles, Credit Risk and Countercyclical Loan Provisions," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República, vol. 32(74), pages 9-17.

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    Keywords

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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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