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Monetary Policy and External Shocks in a Dollarized Economy with Credit Market Imperfections

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  • Koray Alper

Abstract

This paper analyses the transmission of monetary and external shocks in a dollarized economy by making use of a small, static analytical model, which dwells on Agénor and Montiel (2006, 2007). The focus is particularly on the implications of endogenous country risk premium on the transmission of shocks. Endogenous risk premium arises from the imperfect information in international capital markets. As is the case for literature on credit market imperfections, net worth of the banks intermediating between the domestic investors and international capital markets, is the main determinant of countrys risk premium. Fluctuations in the exchange rate affect the net worth of the banks and so the cost of foreign resources which is, in turn, reflected into domestic lending rates. We show that the conventional effects of monetary and external shocks might be reversed in such a setting.

Suggested Citation

  • Koray Alper, 2008. "Monetary Policy and External Shocks in a Dollarized Economy with Credit Market Imperfections," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 8(2), pages 33-73.
    • Handle: RePEc:tcb:cebare:v:8:y:2008:i:2:p:33-73
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    References listed on IDEAS

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    Cited by:

    1. PINSHI, Christian P., 2019. "Dollarization and Foreign Exchange Reserve : Debate on the Effectiveness of Monetary Policy in DR. Congo," MPRA Paper 104807, University Library of Munich, Germany.
    2. Pierre-Richard Agénor & Peter Montiel, 2008. "Monetary Policy Analysis in a Small Open Credit-Based Economy," Open Economies Review, Springer, vol. 19(4), pages 423-455, September.

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    More about this item

    Keywords

    Credit market imperfections; Interest rates; Risk premium; Dollarization; Capital flows;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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