Financial Accelerator Mechanism in a Small Open Economy
Using Bayesian estimation techniques, we estimate a small open economyDSGE model with credit-market imperfections for the Colombian economy. Us-ing the estimated model we investigate what are the sources of business cycle°uctuations. We show that balance-sheet e®ects play an important role in ex-plaining recent Colombian business cycles. We then perform a counterfactualexercise that shows that ¯xed exchange rate regime could have exacerbated the¯nancial distress in the economy between 1998-1999.
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