Optimal v. simple financial policy rules in a production economy with “liability dollarization

Juan Hernandez and Enrique Mendoza

Revista ESPE - Ensayos sobre Política Económica, 2017, vol. 35, issue 82, No 82, 25-39

Abstract: We evaluate the effectiveness of financial policy rules in a small open economy with production, liability dollarization and “unconventional shocks” (global liquidity shifts and news about future fundamentals). Tradable and nontradable final goods are produced with tradable inputs. Debt is denominated in units of tradables and cannot exceed a fraction of the market value of total income. Optimal policy has a macroprudential or ex-ante component (a debt tax levied at date t only when the credit constraint may bind at t+1), and ex-post components (sectoral production taxes/subsidies used when the constraint binds). The optimal policy reduces sharply the frequency and severity of financial crises but is also very complex. Simple policies are less effective and can be welfare reducing.

Keywords: Crisis financieras; Política macro-prudencial; Estabilidad financiera; Riesgo sistémico; Liquidez global; Choques de noticias (search for similar items in EconPapers)
JEL-codes: D62 E32 E44 F32 F41 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://doi.org/10.1016/j.espe.2017.01.004

Related works:
Journal Article: Optimal v. simple financial policy rules in a production economy with “liability dollarization” (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bdr:ensayo:v:35:y:2017:i:82:p:25-39

Access Statistics for this article

Revista ESPE - Ensayos sobre Política Económica is currently edited by Ignacio Lozano-Espitia

More articles in Revista ESPE - Ensayos sobre Política Económica from Banco de la Republica de Colombia Cra 7 # 14-78 Piso 11. Contact information at EDIRC.
Bibliographic data for series maintained by Clorith Angélica Bahos Olivera ().