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Credit Crunch in a Small Open Economy

  • Brzoza-Brzezina, Michal
  • Makarski, Krzysztof

We construct an open-economy DSGE model with a banking sector to analyse the impact of the recent credit crunch on a small open economy. In our model the banking sector operates under monopolistic competition, collects deposits and grants collateralized loans. Collateral effects amplify monetary policy actions, interest rate stickiness dampens the transmission of interest rates, and financial shocks generate non-negligible real and nominal effects. As an application we estimate the model for Poland - a typical small open economy. According to the results, financial shocks had a substantial, though not overwhelming, impact on the Polish economy during the 2008/09 crisis, lowering GDP by a little over one percent.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 18595.

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Date of creation: Nov 2009
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Handle: RePEc:pra:mprapa:18595
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