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Monetary Policy and External Shocks in a Dollarized Economy with Credit Market Imperfections

Koray Alper

Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

Abstract: This paper analyses the transmission of monetary and external shocks in a dollarized economy by making use of a small, static analytical model, which dwells on Agénor and Montiel (2006, 2007). The focus is particularly on the implications of endogenous country risk premium on the transmission of shocks. Endogenous risk premium arises from the imperfect information in international capital markets. As is the case for literature on credit market imperfections, net worth of the banks intermediating between the domestic investors and international capital markets, is the main determinant of country´s risk premium. Fluctuations in the exchange rate a¤ect the net worth of the banks and so the cost of foreign resources which is, in turn, reflected into domestic lending rates. We show that the conventional effects of monetary and external shocks might be reversed in such a setting.

JEL-codes: E44 E51 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-mac and nep-mon
Date: 2007
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Journal Article: Monetary Policy and External Shocks in a Dollarized Economy with Credit Market Imperfections (2008) Downloads
Working Paper: Monetary Policy and External Shocks in a Dollarized Economy with Credit Market Imperfections (2007) Downloads
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Persistent link: http://EconPapers.repec.org/RePEc:tcb:wpaper:0707

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