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

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  • Santiago L.E. Acosta Ormaechea

Abstract

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.

Suggested Citation

  • Santiago L.E. Acosta Ormaechea, 2007. "A Small Open Economy Model with Currency Mismactches and a Financial Accelerator Mechanism," DEGIT Conference Papers c012_035, DEGIT, Dynamics, Economic Growth, and International Trade.
  • Handle: RePEc:deg:conpap:c012_035
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    File URL: http://degit.sam.sdu.dk/papers/degit_12/C012_035.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Credit Market Imperfections; Financial Accelerator; Currency Mismatches; Currency Depreciation.;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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