Do Fixed Exchange Rates Fetter Monetary Policy? A Credit View

Burton Abrams and Russell Settle
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Burton Abrams: University of Delaware
Russell Settle: Western Washington University

Eastern Economic Journal, 2007, vol. 33, issue 2, pages 193-205

Abstract: The Bernanke-Blinder credit-view model is expanded to encompass a small, open economy with fixed exchange rates. In contrast to conventional wisdom and traditional models, monetary policy is resurrected as a stabilization tool. We show that various financial sector shocks have real aggregate demand effects. Further, we demonstrate that independent monetary policy actions can have substantive impacts on aggregate demand despite perfect capital mobility in bond markets and adherence to a fixed exchange rate regime as long as bank loans are imperfectly mobile.

Date: 2007
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