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An Estimated Small Open Economy Model of the Financial Accelerator

Selim Elekdag, Alejandro Justiniano and Ivan Tchakarov
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Ivan Tchakarov: International Monetary Fund

IMF Staff Papers, 2006, vol. 53, issue 2, 2

Abstract: This paper develops a small open economy model in which entrepreneurs partially finance investment using foreign currency-denominated debt subject to an external finance premium. We use Bayesian estimation techniques to evaluate the importance of balance sheet-related credit market frictions for emerging market countries by incorporating the financial accelerator mechanism. We obtain a sizable value for the external finance premium, which is tightly estimated away from zero. Our results support the inclusion of the financial accelerator in an otherwise standard model that-acting through balance sheets-magnifies the impact of shocks, thereby increasing real and financial volatility. Copyright 2006, International Monetary Fund

JEL-codes: C11 F41 (search for similar items in EconPapers)
Date: 2006
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