Monetary Policy Analysis in a Small Open Credit-Based Economy

Pierre-Richard Agénor and Peter Montiel

Centre for Growth and Business Cycle Research Discussion Paper Series from Economics, The University of Manchester

Abstract: This paper describes a simple framework for monetary policy analysis in a small open economy where bank credit is is the only source of external finance. At the heart of the model is the link between banks' lending rates (which incorporate a premium over and above the marginal cost of borrowing) and firms' net worth. In contrast to models in the Stiglitz-Weiss or Kiyotaki-Moore tradition, the supply of bank loans is perfectly elastic at the prevailing rate. The central bank sets the refinance rate and provides unlimited access to liquidity at that rate. The model is used to study the effects of changes in official interest rates, under both fixed and flexible exchange rates. Various extensions are also discussed, including income effects, the cost channel, the role of land as collateral, and dollarization.

Pages: 50 pages
Date: 2007
New Economics Papers: this item is included in nep-cba, nep-dev, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Journal Article: Monetary Policy Analysis in a Small Open Credit-Based Economy (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:man:cgbcrp:90

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