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http://hdl.handle.net/2451/27327
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| Title: | External Constraints on Monetary Policy and the Financial Accelerator |
| Authors: | Gertler, Mark
Gilchrist, Simon
Natalucci, Fabio M. |
| Keywords: | Financial crises
exchange rate policy |
| Issue Date: | Oct-2003 |
| Series/Report no.: | S-MF-03-19 |
| 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.
We show that fixed exchange rates exacerbate financial crises by tying
the hands of the monetary authorities. We then investigate the
quantitative significance by first calibrating the model to Korean data
and then showing that it does a reasonably good job of matching the
Korean experience during its recent financial crisis. In particular, the
model accounts well for the sharp increase in lending rates and the
large drop in output, investment and productivity during the 1997-1998
episode. We then perform some counterfactual exercises to illustrate the
quantitative significance of fixed versus floating rates both for
macroeconomic performance and for welfare. Overall, these exercises
imply that welfare losses following a financial crisis are significantly
larger under fixed exchange rates relative to flexible exchange rates. |
| URI: | http://hdl.handle.net/2451/27327 |
| Appears in Collections: | Macro Finance
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