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The Effects of Bank Lending in an Open Economy

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This article assesses the effects of bank lending in a small open economy with a floating exchange rate and sticky prices. A theoretical model with costly financial intermediation is developed for New Zealand. The results show that the long-run and business cycle effects of bank lending are small. Whether firms borrow from financial intermediaries or public debt markets is unlikely to affect economic activity. In other words, the financial structure, or degree to which a country's financial system is intermediary based or market based, does not matter. Copyright 2007 The Ohio State University.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1538-4616.2007.00063.x
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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 39 (2007)
Issue (Month): 5 (08)
Pages: 1213-1243

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Handle: RePEc:mcb:jmoncb:v:39:y:2007:i:5:p:1213-1243
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Ross Levine, 2002. "Bank-Based or Market-Based Financial Systems: Which is Better?," NBER Working Papers 9138, National Bureau of Economic Research, Inc.
  2. Huang, Angela & Margaritis, Dimitri & Mayes, David, 2001. "Monetary policy rules in practice: Evidence from New Zealand," Research Discussion Papers 18/2001, Bank of Finland.
  3. McCallum, B.T. & Nelson, E., 1998. "Nominal Income Targeting in an Open-Economy Optimizing Model," Papers 644, Stockholm - International Economic Studies.
  4. Mark Gertler & Simon Gilchrist, 1993. "Monetary policy, business cycles and the behavior of small manufacturing firms," Finance and Economics Discussion Series 93-4, Board of Governors of the Federal Reserve System (U.S.).
  5. Cooley, T.F. & Hansen, G.D., 1988. "The Inflation Tax In A Real Business Cycle Model," Papers 88-05, Rochester, Business - General.
  6. Robert E. Lucas, Jr. & Nancy L. Stokey, 1985. "Money and Interest in a Cash-in-Advance Economy," NBER Working Papers 1618, National Bureau of Economic Research, Inc.
  7. Charles T. Carlstrom & Timothy S. Fuerst, 1996. "Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis," Working Paper 9602, Federal Reserve Bank of Cleveland.
  8. Bennett T. McCallum & Edward Nelson, 2001. "Monetary Policy for an Open Economy: An Alternative Framework with Optimizing Agents and Sticky Prices," NBER Working Papers 8175, National Bureau of Economic Research, Inc.
  9. Fuerst, Timothy S, 1995. "Monetary and Financial Interactions in the Business Cycle," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1321-38, November.
  10. Anil K Kashyap & Jeremy C. Stein & David W. Wilcox, 1992. "Monetary Policy and Credit Conditions: Evidence From the Composition of External Finance," NBER Working Papers 4015, National Bureau of Economic Research, Inc.
  11. Jonas D.M. Fisher, 1998. "Credit market imperfections and the heterogeneous response of firms to monetary shocks," Working Paper Series, Macroeconomic Issues 96-23, Federal Reserve Bank of Chicago.
  12. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  13. Sebastian Edwards & Carlos A. VĂ©gh, 1997. "Banks and Macroeconomic Disturbances Under Predetermined Exchange Rates," CEMA Working Papers: Serie Documentos de Trabajo. 115, Universidad del CEMA.
  14. Huang, Angela & Margaritis, Dimitri & Mayes, David, 2001. "Monetary policy rules in practice : Evidence from New Zealand," Research Discussion Papers 18/2001, Bank of Finland.
  15. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
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