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Monetary Policy Analysis in a Small Open Credit-Based Economy

  • Pierre-Richard Agénor
  • Peter J. 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://www.socialsciences.manchester.ac.uk/medialibrary/cgbcr/discussionpapers/dpcgbcr90.pdf
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Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 90.

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Length: 50 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:man:cgbcrp:90
Contact details of provider: Postal: Manchester M13 9PL
Phone: (0)161 275 4868
Fax: (0)161 275 4812
Web page: http://www.socialsciences.manchester.ac.uk/subjects/economics/our-research/centre-for-growth-and-business-cycle-research/

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  11. 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.
  12. Eugenio Gaiotti & Alessandro Secchi, 2004. "Is there a cost channel of monetary policy transmission? An investigation into the pricing behavior of 2,000 firms," Macroeconomics 0412010, EconWPA.
  13. Agenor, Pierre-Richard & Khan, Mohsin S., 1996. "Foreign currency deposits and the demand for money in developing countries," Journal of Development Economics, Elsevier, vol. 50(1), pages 101-118, June.
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  18. Agenor, Pierre-Richard & Jensen, Henning Tarp & Verghis, Mathew & Yeldan, Erinc, 2006. "Disinflation, fiscal sustainability, and labor market adjustment in Turkey," Policy Research Working Paper Series 3804, The World Bank.
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  26. Pierre Richard AGÉNOR & Nihal BAYRAKTAR & Karim EL AYNAOUI, . "Roads out of Poverty? Assessing the Link between Aid, Public Investment, Growth and Poverty Reduction," EcoMod2004 330600003, EcoMod.
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