External constraints on monetary policy and the financial accelerator

Mark Gertler (), Simon Gilchrist () and Fabio Natalucci
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Fabio Natalucci: U.S. Federal Reserve Board - Division of Monetary Affairs

No 139, BIS Working Papers from Bank for International Settlements

Abstract: We develop a small open economy macroeconomic model where financial conditions influence aggregate behavior. We use this model to explore the connection between the exchange rate regime and financial distress. Fixed exchange rates are shown to exacerbate financial crises. Quantitative exercises calibrated to match the Korean experience during the recent Asian crisis are able to replicate key macroeconomic outcomes including the sharp increase in lending rates and the observed drop in output, investment and productivity during the 1997-1998 episode. These exercises imply that welfare losses following a financial crisis are significantly larger under fixed exchange rates relative to flexible exchange rates.

Keywords: financial accelerator; monetary policy; exchange rate regime; financial distress (search for similar items in EconPapers)
Date: 2003-09
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Related works:
Working Paper: External Constraints on Monetary Policy and the Financial Accelerator (2003)
Journal Article: External constraints on monetary policy and the financial accelerator (2001)
Journal Article: External Constraints on Monetary Policy and the Financial Accelerator (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:bis:biswps:139

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