IDEAS home Printed from https://ideas.repec.org/a/bdr/ensayo/v33y2015i77p93-102.html

Asset price bubbles and monetary policy in a small open economy

Author

Listed:
  • Martha López

    (Banco de la República de Colombia)

Abstract

In this paper we expanded the closed economy model by Bernanke and Gertler (1999) in order to account for the macroeconomic effects of an asset price bubble in the context of a small open economy model. During the nineties emerging market economies opened their financial accounts to foreign investment but generated growing macroeconomic imbalances in these economies. Our goal in this paper is twofold: first we want to analyze if the conclusions of Bernanke and Gertler (1999) remain in the case of a small open economy. And second, we want to compare the results in terms of macroeconomic volatility of the model for a closed economy versus the model for a small open economy. Our results show that the conclusion about the fact that the Central Bank should not react to asset price remains as in the case of a closed economy model, and that small open economies are more vulnerable to asset prices bubbles due to capital inflows and the exchange rate mechanism of the monetary policy. Therefore in small open economies the business cycle is deeper. Finally, in the face of a boom followed by a bust in an asset price bubble, macroeconomic volatility would be dampened if the monetary authority focuses only on inflation.

Suggested Citation

  • 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.
    • Handle: RePEc:bdr:ensayo:v:33:y:2015:i:77:p:93-102
    DOI: 10.1016/j.espe.2014.11.003
    as

    Download full text from publisher

    File URL: https://doi.org/10.1016/j.espe.2014.11.003
    Download Restriction: no
    File URL: https://libkey.io/10.1016/j.espe.2014.11.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jose U. Mora & Celso J. Costa Junior, 2019. "FDI Asymmetries in Emerging Economies: The Case of Colombia," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 11(8), pages 1-35, August.
    2. Jose U. Mora & Celso J. Costa Junior, 2019. "FDI Asymmetries in Emerging Economies: The Case of Colombia," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 11(8), pages 1-35, August.
    3. Xin, Baogui & Jiang, Kai, 2023. "Central bank digital currency and the effectiveness of negative interest rate policy: A DSGE analysis," Research in International Business and Finance, Elsevier, vol. 64(C).
    4. GHERBOVEȚ, Sergiu, 2017. "The Poorest In The World Pays For Crisis," Journal of Financial and Monetary Economics, Centre of Financial and Monetary Research "Victor Slavescu", vol. 4(1), pages 141-148.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • R40 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - General
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bdr:ensayo:v:33:y:2015:i:77:p:93-102. See general information about how to correct material in RePEc.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Clorith Angélica Bahos Olivera (email available below). General contact details of provider: https://edirc.repec.org/data/brcgvco.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.