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Credit Market Imperfections and the Monetary Transmission Mechanism Part II: Flexible Exchange Rates

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  • Pierre-Richard Agénor
  • Peter J. Montiel

Abstract

Monetary policy is analyzed in a simple model with credit market imperfections, flexible prices, and a floating exchange rate. Banks’ lending rates incorporate a premium, which depends on firms’ net worth, over the cost of borrowing from the central bank. In contrast to models in the Kiyotaki-Moore tradition, the supply of bank loans is perfectly elastic at the prevailing lending rate. The central bank sets the refinance rate and provides banks with unlimited access to liquidity at that rate. The model is used to study the macroeconomic effects of changes in the refinance and reserve requirement rates, central bank auctions, shifts in the risk premium and contract enforcement costs, and changes in public spending and world interest rates.

Suggested Citation

  • Pierre-Richard Agénor & Peter J. Montiel, 2007. "Credit Market Imperfections and the Monetary Transmission Mechanism Part II: Flexible Exchange Rates," Centre for Growth and Business Cycle Research Discussion Paper Series 87, Economics, The University of Manchester.
    • Handle: RePEc:man:cgbcrp:87
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    File URL: https://hummedia.manchester.ac.uk/schools/soss/cgbcr/discussionpapers/dpcgbcr87.pdf
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Rostom,Ahmed Mohamed Tawfick, 2016. "Money demand in the Arab Republic of Egypt : a vector equilibrium correction model," Policy Research Working Paper Series 7679, The World Bank.
    3. Keyra Primus, 2016. "The Effectiveness of Monetary Policy in Small Open Economies: An Empirical Investigation," IMF Working Papers 2016/189, International Monetary Fund.
    4. Agénor, Pierre-Richard & Aynaoui, Karim El, 2010. "Excess liquidity, bank pricing rules, and monetary policy," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 923-933, May.
    5. Jan Przystupa & Ewa Wróbel, 2016. "Modelling monetary transmission in less developed emerging markets: the case of Tunisia," Bank i Kredyt, Narodowy Bank Polski, vol. 47(5), pages 395-434.
    6. 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.
    7. Primus, Keyra, 2018. "The effectiveness of monetary policy in small open economies," Journal of Policy Modeling, Elsevier, vol. 40(5), pages 903-933.
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