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Evidence for a financial accelerator in a small open economy, and implications for monetary policy

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  • Martha López
  • Juan David Prada
  • Norberto Rodríguez

Abstract

Using Bayesian estimation techniques, we estimatea small open economy dynamic stochastic generalequilibrium model with credit-market imperfectionsfor the Colombian economy. We show thatthe combination of balance sheet effects and thechoice of monetary policy regime are likely to playan important role in the magnification and propagationof initial shocks to the Colombian economy.As an application we show that our model explainsthe 1998-1999 crisis in Colombia, when a sharp risein spreads on a relatively small proportion of internationaldebt were passed strongly onto domesticlending rates, provoking a severe recession.

Suggested Citation

  • Martha López & Juan David Prada & Norberto Rodríguez, 2009. "Evidence for a financial accelerator in a small open economy, and implications for monetary policy," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República, vol. 27(60), pages 12-45, December.
    • Handle: RePEc:col:000107:007813
    DOI: 10.32468/Espe.6001
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    References listed on IDEAS

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    1. Unknown, 1962. "Economic Development And Aid," Increasing Understanding of Public Problems and Policies:1962 17983, Farm Foundation.
    2. repec:tep:teppwp:wp1215 is not listed on IDEAS
    3. Ben S. Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Economic Review, Federal Reserve Bank of Kansas City, vol. 84(Q IV), pages 17-51.
    4. N/A, 2002. "Documents," South Asian Survey, , vol. 9(2), pages 287-304, September.
    5. Unknown, 1962. "Economic Growth Through Regional Associations," Increasing Understanding of Public Problems and Policies:1962 17970, Farm Foundation.
    6. N/A, 2002. "Documents," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 3(2), pages 336-337, September.
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    Citations

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    Cited by:

    1. Martha López, 2015. "Asset price bubbles and monetary policy in a small open economy," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 33(77), pages 93-102, June.
    2. Martha López & Fernando Tenjo & Hector Zárate, 2014. "Credit Cycles, Credit Risk and Countercyclical Loan Provisions," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República, vol. 32(74), pages 9-17, June.
    3. Andrés González & Lavan Mahadeva & Juan D. Prada & Diego Rodríguez, 2011. "Policy Analysis Tool Applied to Colombian Needs: Patacon Model Description," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 29(66), pages 222-245, December.
    4. Martha López Pineros, 2020. "Fiscal Multipliers and Balance Sheet Effects in a Small Open Economy," Revista de Economía del Rosario, Universidad del Rosario, vol. 23(2), pages 1-42, December.
    5. Martha López, 2016. "Fiscal Multipliers, Oil Revenues and Balance Sheet Effects," Borradores de Economia 976, Banco de la Republica de Colombia.

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    More about this item

    Keywords

    DSGE modeling; financial accelerator; bayesian estimation; exchange rate regime.;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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