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Do Fixed Exchange Rates Fetter Monetary Policy? A Credit View

Author

Listed:
  • Burton A. Abrams

    (University of Delaware)

  • Russell F. Settle

    (Western Washington University)

Abstract

The Bernanke-Blinder credit-view model is expanded to encompass a small, open economy with fixed exchange rates. In contrast to conventional wisdom and traditional models, monetary policy is resurrected as a stabilization tool. We show that various financial sector shocks have real aggregate demand effects. Further, we demonstrate that independent monetary policy actions can have substantive impacts on aggregate demand despite perfect capital mobility in bond markets and adherence to a fixed exchange rate regime as long as bank loans are imperfectly mobile.

Suggested Citation

  • Burton A. Abrams & Russell F. Settle, 2007. "Do Fixed Exchange Rates Fetter Monetary Policy? A Credit View," Eastern Economic Journal, Eastern Economic Association, vol. 33(2), pages 193-205, Spring.
  • Handle: RePEc:eej:eeconj:v:33:y:2007:i:2:p:193-205
    as

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    References listed on IDEAS

    as
    1. Mark Gertler, 1988. "Financial structure and aggregate economic activity: an overview," Proceedings, Federal Reserve Bank of Cleveland, pages 559-596.
    2. Driscoll, John C., 2004. "Does bank lending affect output? Evidence from the U.S. states," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 451-471, April.
    3. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    4. Adolfo Barajas & Ralph Chami & Thomas Cosimano, 2004. "Did the Basel Accord Cause a Credit Slowdown in Latin America?," ECONOMIA JOURNAL, THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION - LACEA, vol. 0(Fall 2004), pages 135-182, August.
    5. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
    6. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    7. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, vol. 78(2), pages 435-439, May.
    8. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-276, June.
    9. Alicia GarcĂ­a-Herrero, 1997. "Monetary Impact of a Banking Crisis and the Conduct of Monetary Policy," IMF Working Papers 97/124, International Monetary Fund.
    10. Cuevas, Mario A., 2002. "Money demand in Venezuela : multiple cycle extraction in a cointegration frmaework," Policy Research Working Paper Series 2844, The World Bank.
    11. Volker Treichel, 1997. "Broad Money Demand and Monetary Policy in Tunisia," IMF Working Papers 97/22, International Monetary Fund.
    12. repec:wsi:wschap:9789813108448_0005 is not listed on IDEAS
    13. Howard J. Shatz & David G. Tarr, 2017. "Exchange Rate Overvaluation and Trade Protection: Lessons from Experience," World Scientific Book Chapters,in: Trade Policies for Development and Transition, chapter 5, pages 115-127 World Scientific Publishing Co. Pte. Ltd..
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    More about this item

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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