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External constraints on monetary policy and the financial accelerator

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  • External constraints on monetary policy and the financial accelerator
  • Gertler, Mark; Gilchrist, Simon; Natalucci, Fabio
  • National Bureau of Economic Research


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Title External constraints on monetary policy and the financial accelerator
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Material Type Reports
Author(English)

Gertler, Mark; Gilchrist, Simon; Natalucci, Fabio

Publisher

Cambridge:National Bureau of Economic Research

Date 2003-12
Series Title; No NBER Working Paper Series / 10128
Pages 50
Subject Country South Korea(Asia and Pacific)
Language English
File Type Link
Original Format pdf
Subject Economy < Financial Policy
Holding National Bureau of Economic Research

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 tieing 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. (The rest omitted)