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Financial friction in an emerging economy

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  • Hwang, Yu-Ning

Abstract

The objective of this study is to evaluate the role of the frictional domestic credit market in an emerging country by using a small-open-economy DSGE model with a banking sector. The calibration results show that the financial friction does not significantly influence the macroeconomic effects of the shocks to the domestic productivity, foreign interest rate and export demand. We also evaluate whether and how the trade and financial openness can influence the effects of the domestic financial shocks that in turn affect the supply of loans in the credit market. We show that greater trade and financial openness can reduce the macroeconomic impacts of the domestic financial distress. Under a more open international capital market, the capital outflow caused by the domestic financial shock does not lead to drastic exchange rate variation. This helps dampen the adverse effects of the financial distress on the economy.

Suggested Citation

  • Hwang, Yu-Ning, 2012. "Financial friction in an emerging economy," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 212-227.
  • Handle: RePEc:eee:jimfin:v:31:y:2012:i:2:p:212-227
    DOI: 10.1016/j.jimonfin.2011.11.001
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    3. Kauko, Karlo, 2014. "How to foresee banking crises? A survey of the empirical literature," Economic Systems, Elsevier, vol. 38(3), pages 289-308.

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    More about this item

    Keywords

    Small-open-economy DSGE model; Financial friction; Financial crisis in emerging economy; Economic openness;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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