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Spillovers, capital flows and prudential regulation in small open economies

Author

Listed:
  • Castillo, Paul

    (Banco Central de Reserva del Perú)

  • Carrera, Cesar

    (Banco Central de Reserva del Perú)

  • Ortiz, Marco

    (Banco Central de Reserva del Perú)

  • Vega, Hugo

    (Banco Central de Reserva del Perú)

Abstract

This paper extends the model of Aoki et al. (2009) considering a two sector small open economy. We study the interaction of borrowing, asset prices, and spillovers between tradable and non-tradable sectors. Our results suggest that when it is difficult to enforce debtors to repay their debt unless it is secured by collateral, a productivity shock in the tradable sector generates an increase in asset prices and leverage that spills over to the non-tradable sector, generating an appreciation of the real exchange and an increase in domestic lending. Macro-prudential instruments are introduced under the form of cyclical loan-to-value ratios that limit the amount of capital that entrepreneurs can pledge as collateral. Cyclical taxes that respond to the movements in the price of non-tradable goods are analyzed. Simulation results show that this type of instruments significantly lessen the amplifying effects of borrowing constraints on small open economies and consequently reduce output and asset price volatility.

Suggested Citation

  • Castillo, Paul & Carrera, Cesar & Ortiz, Marco & Vega, Hugo, 2014. "Spillovers, capital flows and prudential regulation in small open economies," Working Papers 2014-006, Banco Central de Reserva del Perú.
  • Handle: RePEc:rbp:wpaper:2014-006
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    References listed on IDEAS

    as
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    Cited by:

    1. Alan Finkelstein Shapiro & Andres Gonzalez, 2015. "Macroprudential Policy and Labor Market Dynamics in Emerging Economies," IMF Working Papers 15/78, International Monetary Fund.
    2. Ribeiro, Joao, 2015. "Medidas macroprudenciales y política monetaria en una economía pequeña y abierta," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 29, pages 55-76.

    More about this item

    Keywords

    Collateral; productivity; small open economy.;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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