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A Small Open Economy Model with Currency Mismactches and a Financial Accelerator Mechanism

  • Santiago L.E. Acosta Ormaechea
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    We develop a two-sectors small open economy model with imperfect competition, one-period nominal price rigidities and a financial accelerator mechanism. The latter assumes an asymmetric information problem between lenders and capital good producers (entrepreneurs). Studying the zero-inflation steady state, it is shown that the model with the financial accelerator mechanism nests a fairly standard RBC model; case in which entrepreneurs “disappear" as a differentiated sector from households. It is also explained that credit market imperfections essentially reduce the aggregate supply of capital relative to the RBC case. Turning to the dynamics, we study the effects of an unanticipated and permanent increase in the level of the money supply. In this context the exchange rate jumps immediately to its new steady state level without showing any overshooting process as in Dornbusch (1976). Analysing the case without credit market imperfections but with pre-set prices, it is demonstrated that money is not neutral in the long-run, that capital adds persistence to the initial shock, and that some traditional results of the Mundell-Fleming model still hold.

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    Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c012_035.

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    Length: 49 pages
    Date of creation: Jun 2007
    Date of revision:
    Handle: RePEc:deg:conpap:c012_035
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    3. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
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    6. Burstein, Ariel Tomas & Eichenbaum, Martin & Rebelo, Sérgio, 2004. "Large Devaluations and the Real Exchange Rate," CEPR Discussion Papers 4810, C.E.P.R. Discussion Papers.
    7. Timothy S. Fuerst & Charles T. Carlstrom, 1998. "Agency costs and business cycles," Economic Theory, Springer, vol. 12(3), pages 583-597.
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    13. repec:rus:hseeco:124089 is not listed on IDEAS
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