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Monetary Policy Analysis in a Small Open Credit-Based Economy

  • Pierre-Richard Agénor

    ()

  • Peter Montiel

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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File URL: http://hdl.handle.net/10.1007/s11079-008-9083-7
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Article provided by Springer in its journal Open Economies Review.

Volume (Year): 19 (2008)
Issue (Month): 4 (September)
Pages: 423-455

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Handle: RePEc:kap:openec:v:19:y:2008:i:4:p:423-455
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=100323

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  12. Agenor, Pierre-Richard & Aizenman, Joshua, 2006. "Investment and deposit contracts under costly intermediation and aggregate volatility," International Review of Economics & Finance, Elsevier, vol. 15(3), pages 263-275.
  13. Pierre-Richard Agénor & Peter J. Montiel, 2006. "Credit Market Imperfections and the Monetary Transmission Mechanism Part I: Fixed Exchange Rates," The School of Economics Discussion Paper Series 0628, Economics, The University of Manchester.
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  26. Ravenna, Federico & Walsh, Carl E., 2006. "Optimal monetary policy with the cost channel," Journal of Monetary Economics, Elsevier, vol. 53(2), pages 199-216, March.
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