IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Household and firm leverage, capital flows and monetary policy in a small open economy

Listed author(s):
  • Mara Pirovano

    ()

    (University of Antwerp, Faculty of Applied Economics
    Catholic University of Leuven, Center of Economic Studies)

This paper outlines a framework for analysing the interaction between financial frictions at the household and firm level, liability dollarization and optimal monetary policy in a small, open economy subject to productivity and capital inflow shocks. It is found that, first, for the shocks under review, the extent of co-movement of financial variables pertaining to entrepreneurs and homeowners crucially depends on the degree of exchange rate flexibility. Second, for a central bank not concerned with financial stability, reacting to inflation and output is considered optimal. Third, including financial stability in the central bank's objectives results in an optimal monetary policy rule reacting to exchange rate depreciation, but not to credit growth, even in the case of large capital inflow shocks. In fact, reacting to credit growth reinforces the initial shock, increasing financial imbalances.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: https://www.nbb.be/doc/oc/repec/reswpp/wp246en.pdf
Download Restriction: no

Paper provided by National Bank of Belgium in its series Working Paper Research with number 246.

as
in new window

Length: 42 pages
Date of creation: Nov 2013
Handle: RePEc:nbb:reswpp:201311-246
Contact details of provider: Postal:
Boulevard de Berlaimont 14, B-1000 Bruxelles

Phone: (+ 32) (0) 2 221 25 34
Fax: (+ 32) (0) 2 221 31 62
Web page: https://www.nbb.be/
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Paolo Gelain & Dmitry Kulikov, 2011. "An Estimated Dynamic Stochastic General Equilibrium Model with Financial Frictions for Estonia," Eastern European Economics, M.E. Sharpe, Inc., vol. 49(5), pages 97-120, September.
  2. Calderon, Cesar & Fuentes, Rodrigo, 2010. "Characterizing the business cycles of emerging economies," Policy Research Working Paper Series 5343, The World Bank.
  3. Chiara Forlati & Luisa Lambertini, 2011. "Risky Mortgages in a DSGE Model," International Journal of Central Banking, International Journal of Central Banking, vol. 7(1), pages 285-335, March.
  4. Ben S. Bernanke & Mark Gertler, 2001. "Should Central Banks Respond to Movements in Asset Prices?," American Economic Review, American Economic Association, vol. 91(2), pages 253-257, May.
  5. Tommaso Monacelli, 2003. "Monetary Policy in a Low Pass-Through Environment," Working Papers 228, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  6. D. Filiz Unsal, 2013. "Capital Flows and Financial Stability: Monetary Policy and Macroprudential Responses," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 233-285, March.
  7. Vasco Cúrdia, 2005. "Monetary Policy under Sudden Stops," International Finance 0510025, EconWPA, revised 02 Nov 2005.
  8. Morris A. Davis, 2010. "housing and the business cycle," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
  9. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
  10. Selim Elekdag & Alejandro Justiniano & Ivan Tchakarov, 2006. "An Estimated Small Open Economy Model of the Financial Accelerator," IMF Staff Papers, Palgrave Macmillan, vol. 53(2), pages 1-2.
  11. Disyatat, Piti, 2010. "Inflation targeting, asset prices, and financial imbalances: Contextualizing the debate," Journal of Financial Stability, Elsevier, vol. 6(3), pages 145-155, September.
  12. Mark Gertler & Simon Gilchrist & Fabio M. Natalucci, 2007. "External Constraints on Monetary Policy and the Financial Accelerator," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 295-330, 03.
  13. Michael B. Devereux & Philip R. Lane & Juanyi Xu, 2006. "Exchange Rates and Monetary Policy in Emerging Market Economies," Economic Journal, Royal Economic Society, vol. 116(511), pages 478-506, 04.
  14. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-248, April.
  15. Solomon, Bernard Daniel, 2010. "Firm leverage, household leverage and the business cycle," MPRA Paper 26504, University Library of Munich, Germany.
  16. Paul Krugman, 1999. "Balance Sheets, the Transfer Problem, and Financial Crises," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 6(4), pages 459-472, November.
  17. Ian Christensen & Ali Dib, 2008. "The Financial Accelerator in an Estimated New Keynesian Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 155-178, January.
  18. Nicoletta Batini & Paul Levine & Joseph Pearlman, 2007. "Monetary Rules in Emerging Economies with Financial Market Imperfections," NBER Chapters, in: International Dimensions of Monetary Policy, pages 251-311 National Bureau of Economic Research, Inc.
  19. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2001. "Currency crises and monetary policy in an economy with credit constraints," European Economic Review, Elsevier, vol. 45(7), pages 1121-1150.
  20. Faia, Ester & Monacelli, Tommaso, 2005. "Optimal Monetary Policy Rules, Asset Prices and Credit Frictions," CEPR Discussion Papers 4880, C.E.P.R. Discussion Papers.
  21. Paolo Gelain & Dmitry Kulikov, 2009. "An estimated dynamic stochastic general equilibrium model for Estonia," Bank of Estonia Working Papers 2009-5, Bank of Estonia, revised 30 Dec 2009.
  22. 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.
  23. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December.
  24. Sirtaine, Sophie & Skamnelos, Ilias, 2007. "Credit growth in emerging Europe : a cause for stability concerns?," Policy Research Working Paper Series 4281, The World Bank.
  25. Luis Felipe Céspedes & Roberto Chang & Andrés Velasco, 2004. "Balance Sheets and Exchange Rate Policy," American Economic Review, American Economic Association, vol. 94(4), pages 1183-1193, September.
  26. Brzoza-Brzezina, Michał & Makarski, Krzysztof, 2011. "Credit crunch in a small open economy," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1406-1428.
  27. Güneş Kamber & Christoph Thoenissen, 2013. "Financial Exposure and the International Transmission of Financial Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(s2), pages 127-158, December.
  28. International Monetary Fund, 2010. "The Credit Boom in the EU New Member States; Bad Luck or Bad Policies?," IMF Working Papers 10/130, .
  29. Roland Straub & Günter Coenen, 2005. "Non-Ricardian Households and Fiscal Policy in an Estimated DSGE Model of the Euro Area," Computing in Economics and Finance 2005 102, Society for Computational Economics.
  30. Matteo Iacoviello & Stefano Neri, 2010. "Housing Market Spillovers: Evidence from an Estimated DSGE Model," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 125-164, April.
  31. Gunes Kamber & Christoph Thoenissen, 2011. "Financial intermediation and the international business cycle: The case of small countries with big banks," CDMA Working Paper Series 201108, Centre for Dynamic Macroeconomic Analysis.
  32. Viktors Ajevskis & Kristine Vitola, 2011. "Housing and Banking in a Small Open Economy DSGE Model," Working Papers 2011/03, Latvijas Banka.
  33. Marcin Kolasa & Giovanni Lombardo, 2014. "Financial Frictions and Optimal Monetary Policy in an Open Economy," International Journal of Central Banking, International Journal of Central Banking, vol. 10(1), pages 43-94, March.
  34. Vasco Curdia & Michael Woodford, 2010. "Credit Spreads and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 3-35, 09.
  35. Fiorella De Fiore & Oreste Tristani, 2013. "Optimal Monetary Policy in a Model of the Credit Channel," Economic Journal, Royal Economic Society, vol. 123(571), pages 906-931, 09.
  36. Merola, Rossana, 2010. "Optimal monetary policy in a small open economy with financial frictions," Discussion Paper Series 1: Economic Studies 2010,01, Deutsche Bundesbank, Research Centre.
  37. Kannan Prakash & Rabanal Pau & Scott Alasdair M., 2012. "Monetary and Macroprudential Policy Rules in a Model with House Price Booms," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-44, June.
  38. Aoki, Kosuke & Proudman, James & Vlieghe, Gertjan, 2004. "House prices, consumption, and monetary policy: a financial accelerator approach," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 414-435, October.
  39. James B. Bullard & Eric Schaling, 2002. "Why the Fed should ignore the stock market," Review, Federal Reserve Bank of St. Louis, issue Mar., pages 35-42.
  40. Vasco Curdia, 2008. "Optimal Monetary Policy under Sudden Stops," 2008 Meeting Papers 474, Society for Economic Dynamics.
  41. repec:bth:wpaper:2005-09 is not listed on IDEAS
  42. Donald L. Kohn, 2006. "Monetary policy and asset prices: a speech at “Monetary Policy: a Journey from Theory to Practice,” a European Central Bank Colloquium held in honor of Otmar Issing, Frankfurt, Germany, March 16, 2006," Speech 174, Board of Governors of the Federal Reserve System (U.S.).
  43. Bordo, Michael D & Jeanne, Olivier, 2002. "Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense?," International Finance, Wiley Blackwell, vol. 5(2), pages 139-164, Summer.
  44. Bordo, Michael D & Jeanne, Olivier, 2002. "Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense?," International Finance, Wiley Blackwell, vol. 5(2), pages 139-164, Summer.
  45. Romain Rancière & Aaron Tornall & Athanasio Vamvakidis, 2010. "Currency mismatch, systemic risk and growth in emerging Europe," Post-Print halshs-00754418, HAL.
  46. Gergely Kiss & Márton Nagy & Balázs Vonnák, 2006. "Credit Growth in Central and Eastern Europe: Convergence or Boom?," MNB Working Papers 2006/10, Magyar Nemzeti Bank (Central Bank of Hungary).
  47. Angeloni, Ignazio & Faia, Ester, 2013. "Capital regulation and monetary policy with fragile banks," Journal of Monetary Economics, Elsevier, vol. 60(3), pages 311-324.
  48. Ian Christensen & Paul Corrigan & Caterina Mendicino & Shin-Ichi Nishiyama, 2016. "Consumption, housing collateral and the Canadian business cycle," Canadian Journal of Economics, Canadian Economics Association, vol. 49(1), pages 207-236, February.
  49. White, William R., 2009. "Should monetary policy "lean or clean"?," Globalization and Monetary Policy Institute Working Paper 34, Federal Reserve Bank of Dallas.
  50. Romain Ranciere & Aaron Tornell & Athanasios Vamvakidis, 2010. "Currency mismatch, systemic risk and growth in emerging Europe," Economic Policy, CEPR;CES;MSH, vol. 25, pages 597-658, October.
  51. Pritha Mitra, 2011. "Capital Flows to EU New Member States; Does Sector Destination Matter?," IMF Working Papers 11/67, International Monetary Fund.
  52. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2012. "Macroeconomic Stability, Financial Stability, and Monetary Policy Rules," International Finance, Wiley Blackwell, vol. 15(2), pages 205-224, 06.
  53. F. Gulcin Ozkan & D. Filiz Unsal, 2012. "Global financial crisis, financial contagion and emerging markets," Discussion Papers 12/35, Department of Economics, University of York.
  54. Mara Pirovano & Jacques Vanneste & André Van Poeck, 2011. "Portfolio and Short-term Capital Inflows to the New and Potential EU Countries: Patterns and Determinants," Chapters, in: The Economic Crisis and European Integration, chapter 12 Edward Elgar Publishing.
  55. Brzoza-Brzezina, Michał & Kolasa, Marcin & Makarski, Krzysztof, 2013. "The anatomy of standard DSGE models with financial frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 32-51.
  56. Darracq Pariès, Matthieu & Notarpietro, Alessandro, 2008. "Monetary policy and housing prices in an estimated DSGE for the US and the euro area," Working Paper Series 0972, European Central Bank.
  57. F. Gulcin Ozkan & D. Filiz Unsal, 2012. "Global financial crisis, financial contagion and emerging markets," Discussion Papers 12/35, Department of Economics, University of York.
  58. Ester Faia, 2010. "Financial Frictions And The Choice Of Exchange Rate Regimes," Economic Inquiry, Western Economic Association International, vol. 48(4), pages 965-982, October.
  59. Michael Woodford, 2012. "Inflation Targeting and Financial Stability," NBER Working Papers 17967, National Bureau of Economic Research, Inc.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:nbb:reswpp:201311-246. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.