A Macro Model of the Credit Channel in a Currency Union Member: The Case of Benin

Issouf Samaké

No 2010/191, IMF Working Papers from International Monetary Fund

Abstract: This paper applies and extends a theoretical model built by Agénor and Montiel (2007) by exploring the effectiveness of government bonds and monetary policy in a small, open, credit-based economy with a fixed exchange rate. The model is applied to Benin, a member of a currency union, using a general equilibrium model with stochastic simulation. Model calibration replicates the historical pattern for 1996–2009. Policy experiments simulated an increase in government securities in Benin’s regional market and a cut in the reserve requirement. Simulations produced mixed results. It appears that, among other factors, excess bank liquidity lowers the effectiveness of monetary policy instruments through the credit channel and that government bonds can help mop up excess bank liquidity.

Keywords: WP; bank liquidity; open economy; Benin; Credit channel; excess liquidity; government bonds; general equilibrium; stochastic simulation; Benin economy; reserve ratio; bank balance; interest rate differential; loan payment; baseline bond; Goverenment bonds shock; government bond holding; bank loan rate; bank product; Sovereign bonds; Bank credit; Reserve requirements; Bonds; Credit; Sub-Saharan Africa (search for similar items in EconPapers)
Pages: 26
Date: 2010-08-01
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Citations: View citations in EconPapers (3)

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