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Banks and Macroeconomics Disturbances under Predetermined Exchange Rates

  • Sebastian Edwards
  • Carlos A. Vegh

As the recent Mexican crisis vividly illustrates, Latin American countries often go through boom-bust cycles caused by both domestic policies and external shocks. Such cycles are typically magnified by weak banking systems which intermediate large capital inflows. This paper develops a simple optimizing model to analyze how the banking sector affects the propagation of shocks. In particular, we show how the world business cycle and shocks to the banking system affect output and employment through fluctuations in bank credit. We also analyze the countercyclical use of reserve requirements. Econometric evidence for Chile and Mexico supports the main predictions of the model.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5977.

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Date of creation: Mar 1997
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Publication status: published as Journal of Monetary Economics, Vol.40 (November 1997): 239-278.
Handle: RePEc:nbr:nberwo:5977
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  10. Calvo, Guillermo A. & Mendoza, Enrique G., 1996. "Mexico's balance-of-payments crisis: a chronicle of a death foretold," Journal of International Economics, Elsevier, vol. 41(3-4), pages 235-264, November.
  11. Roldos, Jorge E, 1997. "On gradual disinflation, the real exchange rate, and the current account," Journal of International Money and Finance, Elsevier, vol. 16(1), pages 37-54, February.
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  13. Marianne Baxter & Robert G. King, 1995. "Measuring Business Cycles Approximate Band-Pass Filters for Economic Time Series," NBER Working Papers 5022, National Bureau of Economic Research, Inc.
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  20. Lahiri, Amartya, 2001. "Exchange rate based stabilizations under real frictions: The role of endogenous labor supply," Journal of Economic Dynamics and Control, Elsevier, vol. 25(8), pages 1157-1177, August.
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  22. Jeffrey A. Frankel, 1993. "On Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061546.
  23. Steven Riess Weisbrod & Liliana Rojas-Suárez, 1994. "Financial Market Fragilities in Latin America; From Banking Crisis Resolution to Current Policy Challenges," IMF Working Papers 94/117, International Monetary Fund.
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  25. Guillermo A. Calvo, 1995. "Varieties of Capital-Market Crises," Research Department Publications 4008, Inter-American Development Bank, Research Department.
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