The Federal Reserve’s Interest Rate Normalization: Does It Matter Who Borrows from Abroad in EME?

Victoria Nuguer

in Premio de Banca Central Rodrigo Gómez / Central Banking Award "Rodrigo Gómez" from Centro de Estudios Monetarios Latinoamericanos, CEMLA

Abstract: In this study, the author builds a small open economy model with banks and exporting firms. She observes that an increase in the foreign interest rate makes borrowing more expensive and brings the econ¬omy into a recession. When natural nonhedged firms borrow from abroad, an increase in the foreign interest rate prompts more volatility in the emerging economy than when naturally hedged firms borrow from abroad. Thus, she proposes a nonconventional policy in which the financial authority lends to nonhedged firms when foreign borrowing is more expensive. Finally, she observes that households are better-off with the policy than without it. With the publication of the Central Bank Award Rodrigo Gómez 2017, CEMLA aims to continue con¬tributing with the research development and seeking a better understanding of the economic phenomena that are of interested of central banking in the region.

Keywords: emerging market economies; financial frictions; unconventional policy. (search for similar items in EconPapers)
JEL-codes: E44 F42 G21 G28 (search for similar items in EconPapers)
Date: 2017
ISBN: 978-607-8582-04-4
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