External Constraints on Monetary Policy and the Financial Accelerator

Mark L. Gertler (), Simon Gilchrist () and Fabio M. Natalucci

Journal of Money, Credit and Banking, 2007, vol. 39, issue 2-3, pages 295-330

Abstract: We develop a small open economy macroeconomic model where financial conditions influence aggregate behavior. Our goal is to explore the connection between the exchange rate regime and financial distress. We first show that a calibrated version of the model captures well the behavior of the Korean economy during its financial crisis period of 1997-98. In particular, the model accounts for the sharp increase in lending rates and the large drop in output, employment, investment, and measured productivity. The financial market frictions play an important role, further, explaining roughly half the decline in overall economic activity. We then perform some counterfactual exercises to illustrate how the fixed exchange rate regime likely exacerbated the crisis by tying the hands of monetary policy. Copyright 2007 The Ohio State University.

Date: 2007
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Related works:
Working Paper: External constraints on monetary policy and the financial accelerator (2003)
Working Paper: External Constraints on Monetary Policy and the Financial Accelerator (2003)
Journal Article: External constraints on monetary policy and the financial accelerator (2001)
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Persistent link: http://EconPapers.repec.org/RePEc:mcb:jmoncb:v:39:y:2007:i:2-3:p:295-330

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