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Monetary Policy Analysis in a Small Open Credit-Based Economy

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  • Pierre-Richard Agénor
  • Peter Montiel

Abstract

This paper describes a simple framework for monetary policy analysis in a small open economy where bank credit is is the only source of external finance. At the heart of the model is the link between banks' lending rates (which incorporate a premium over and above the marginal cost of borrowing) and firms' net worth. In contrast to models in the Stiglitz-Weiss or Kiyotaki-Moore tradition, the supply of bank loans is perfectly elastic at the prevailing rate. The central bank sets the refinance rate and provides unlimited access to liquidity at that rate. The model is used to study the effects of changes in official interest rates, under both fixed and flexible exchange rates. Various extensions are also discussed, including income effects, the cost channel, the role of land as collateral, and dollarization.
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  • Pierre-Richard Agénor & Peter Montiel, 2008. "Monetary Policy Analysis in a Small Open Credit-Based Economy," Open Economies Review, Springer, vol. 19(4), pages 423-455, September.
    • Handle: RePEc:kap:openec:v:19:y:2008:i:4:p:423-455
    DOI: 10.1007/s11079-008-9083-7
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    Cited by:

    1. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2013. "Inflation Targeting and Financial Stability: A Perspective from the Developing World," Working Papers Series 324, Central Bank of Brazil, Research Department.
    2. Agénor, Pierre-Richard & Pereira da Silva, Luiz A., 2014. "Macroprudential regulation and the monetary transmission mechanism," Journal of Financial Stability, Elsevier, vol. 13(C), pages 44-63.
    3. Agénor, Pierre-Richard & Pereira da Silva, Luiz A., 2012. "Cyclical effects of bank capital requirements with imperfect credit markets," Journal of Financial Stability, Elsevier, vol. 8(1), pages 43-56.
    4. Pengfei Jia & King Yoong Lim, 2021. "The stabilization role of police spending in a neo‐Keynesian economy with credit market imperfections," Scottish Journal of Political Economy, Scottish Economic Society, vol. 68(1), pages 103-125, February.
    5. Malikane, Christopher, 2012. "Inflation dynamics and the cost channel in emerging markets," MPRA Paper 42688, University Library of Munich, Germany.
    6. Agénor, Pierre-Richard & Aynaoui, Karim El, 2010. "Excess liquidity, bank pricing rules, and monetary policy," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 923-933, May.
    7. Agénor, Pierre-Richard & Bayraktar, Nihal, 2010. "Contracting models of the Phillips curve empirical estimates for middle-income countries," Journal of Macroeconomics, Elsevier, vol. 32(2), pages 555-570, June.
    8. Agénor, P.-R. & Alper, K. & Pereira da Silva, L., 2012. "Capital requirements and business cycles with credit market imperfections," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 687-705.
    9. Stephen A. O'Connell, 2011. "Towards a Rule-based Approach to Monetary Policy Evaluation in Sub-Saharan Africa-super- †," Journal of African Economies, Centre for the Study of African Economies, vol. 20(suppl_2), pages -66, May.
    10. Primus, Keyra, 2013. "Excess Reserves, Monetary Policy and Financial Volatility," MPRA Paper 51670, University Library of Munich, Germany.
    11. Taiyo Yoshimi, 2014. "Lending Rate Spread Shock and Monetary Policy Arrangements: A Small Open Economy Model for ASEAN Countries," Asian Economic Journal, East Asian Economic Association, vol. 28(1), pages 19-39, March.
    12. Keyra Primus, 2013. "'Excess Reserves, Monetary Policy and Financial Volatility," Centre for Growth and Business Cycle Research Discussion Paper Series 183, Economics, The University of Manchester.
    13. King Yoong Lim & Pengfei Jia, 2019. "Police spending and economic stabilization in a monetary economy with crime and differential human capital," NBS Discussion Papers in Economics 2019/02, Economics, Nottingham Business School, Nottingham Trent University.
    14. Igor Ézio Maciel Silva & Nelson Leitão Paes & Jocildo Fernandes Bezerra, 2016. "Evidences Of Incomplete Interest Rate Pass-Through, Directed Credit And Cost Channel Of Monetary Policy In Brazil," Anais do XLIII Encontro Nacional de Economia [Proceedings of the 43rd Brazilian Economics Meeting] 036, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    15. Mr. Jaromir Benes & Mr. Andrew Berg & Mr. Rafael A Portillo & Mai Dao & Mr. Alfredo Baldini, 2012. "Monetary Policy in Low Income Countries in the Face of the Global Crisis: The Case of Zambia," IMF Working Papers 2012/094, International Monetary Fund.
    16. Roy Zilberman, 2012. "Supply Shocks and the Cyclical Behaviour of Bank Lending Rates under the Basel Accords," Centre for Growth and Business Cycle Research Discussion Paper Series 161, Economics, The University of Manchester.
    17. Leighton Vaughan Williams & Chunping Liu & Hannah Gerrard, 2019. "How well do Elo-based ratings predict professional tennis matches?," NBS Discussion Papers in Economics 2019/03, Economics, Nottingham Business School, Nottingham Trent University.
    18. Moumita Basu & Ranjanendra Narayan Nag, 2018. "Dualism, exchange rate, and employment: a structuralist model," Indian Economic Review, Springer, vol. 53(1), pages 287-310, December.

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    More about this item

    Keywords

    Monetary policy; Credit market imperfections; Small open economy; E44; E51; F41;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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