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External constraints on monetary policy and the financial accelerator

Author

Listed:
  • Mark Gertler

    (New York University - Department of Economics)

  • Simon Gilchrist

    (Boston University - Department of Economics)

  • Fabio M. Natalucci

    (U.S. Federal Reserve Board - Division of Monetary Affairs)

Abstract

We develop a small open economy macroeconomic model where financial conditions influence aggregate behavior. We use this model to explore the connection between the exchange rate regime and financial distress. Fixed exchange rates are shown to exacerbate financial crises. Quantitative exercises calibrated to match the Korean experience during the recent Asian crisis are able to replicate key macroeconomic outcomes including the sharp increase in lending rates and the observed drop in output, investment and productivity during the 1997-1998 episode. These exercises imply that welfare losses following a financial crisis are significantly larger under fixed exchange rates relative to flexible exchange rates.

Suggested Citation

  • Mark Gertler & Simon Gilchrist & Fabio M. Natalucci, 2003. "External constraints on monetary policy and the financial accelerator," BIS Working Papers 139, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:139
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    More about this item

    Keywords

    financial accelerator; monetary policy; exchange rate regime; financial distress;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance

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