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A Small Open Economy with Heterogenous Agents Facing Interest Rate Ceilings on Loans

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  • Arend, Mario

Abstract

The aim of this paper is to explore the effects of interest rate ceilings in a small open economy. In order to account for many individuals and lending, a model with heterogenous agents is considered. The investigation is focused on two issues: first, how effective are interest rate ceilings at reducing loans and risk in the economy and at what cost; and second, whether imposing interest rate limits produce any different response of the variables to aggregate shocks in the economy. The results obtained from the model show that interest rate ceilings are effective at reducing high risk debt in the financial system. The cost on consumption of reducing this risk is minimum in the model. The findings for the second issue show that interest rate ceilings make debt more responsive to shocks on the interest rates. In particular, the effect in percentage points of an increase of interest rates could be twice as negative on debt under interest rate ceilings.

Suggested Citation

  • Arend, Mario, 2009. "A Small Open Economy with Heterogenous Agents Facing Interest Rate Ceilings on Loans," MPRA Paper 19427, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:19427
    as

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    File URL: https://mpra.ub.uni-muenchen.de/19427/1/MPRA_paper_19427.pdf
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    References listed on IDEAS

    as
    1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
    2. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 659-684.
    3. Tobin, James, 1970. "Deposit Interest Ceilings as a Monetary Control," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 2(1), pages 4-14, February.
    4. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October.
    5. Marco A. Espinosa-Vega & Bruce D. Smith, 2001. "Socially excessive bankruptcy costs and the benefits of interest rate ceilings on loans," FRB Atlanta Working Paper 2001-27, Federal Reserve Bank of Atlanta.
    6. Mendoza, Enrique G. & Uribe, Martin, 2000. "Devaluation risk and the business-cycle implications of exchange-rate management," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 53(1), pages 239-296, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Small open economy; Heterogenous Agents; Incomplete markets; Interest rate ceilings; Financial frictions; Numerical solutions.;

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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