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Monetary policy and financial shocks in an empirical small open-economy DSGE model

Rudi Steinbach, Stan Du Plessis () and Ben Smit

No 7194, EcoMod2014 from EcoMod

Abstract: Determine the optimal response of a small open economy's central bank to financial shocks that lead to increases in credit spreads. Increasing credit spreads reduce the efficacy of monetary policy when the central bank is reducing the policy rate to accommodate a lowering in economic activity.Used a DSGE model that incorporates heterogeneous households and financial intermediaries. Financial shocks leads to an increase in non-performing loans, which in turn causes the financial intermediary to increase the spread over the policy rate at which it is willing to lend.The central bank should reduce the policy rate in response to rising credit spreads, however this response is more muted when compared to a closed economy facing a similar shock.

Keywords: South Africa / Italy; Monetary issues; Macroeconometric modeling (search for similar items in EconPapers)
Date: 2014-07-03
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
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Handle: RePEc:ekd:006356:7194