THE BALANCE SHEET CHANNEL IN A SMALL OPEN ECONOMY IN A MONETARY UNION

2012 ◽  
Vol 18 (3) ◽  
pp. 278-292
Author(s):  
João Sousa ◽  
Isabel Marques Gameiro
Keyword(s):  
Monetary Union ◽  
Open Economy ◽  
Small Open Economy ◽  
Balance Sheet ◽  
Balance Sheet Channel

scholarly journals Capital controls as a credit policy tool in a small open economy

2017 ◽  
Vol 18 (1) ◽  
Author(s):  
Shigeto Kitano ◽  
Kenya Takaku
Keyword(s):  
Open Economy ◽  
Emerging Economies ◽  
Financial Frictions ◽  
Small Open Economy ◽  
Balance Sheet ◽  
Monetary Economics ◽  
Capital Controls ◽  
Financial Intermediaries ◽  
Credit Policy ◽  
Policy Tool

AbstractWe develop a sticky price, small open economy model with financial frictions à la [Gertler, Mark, and Peter Karadi. 2011. “A Model of Unconventional Monetary Policy.”Journal of Monetary Economics58 (1): 17–34.], in combination with liability dollarization. An agency problem between domestic financial intermediaries and foreign investors of emerging economies introduces financial frictions in the form of time-varying endogenous balance sheet constraints on the domestic financial intermediaries. We consider a shock that tightens the balance sheet constraint and show that capital controls, the effects of which are rigorously examined as a policy tool for the emerging economies, can be a credit policy tool to mitigate the negative shock.

scholarly journals External Shocks and FX Intervention Policy in Emerging Economies

2021 ◽  
Author(s):  
Alex Carrasco ◽  
David Florián Hoyle
Keyword(s):  
Exchange Rate ◽  
Open Economy ◽  
Exchange Rate Regime ◽  
Emerging Market ◽  
Agency Problem ◽  
Small Open Economy ◽  
Balance Sheet ◽  
Policy Instrument ◽  
External Shocks ◽  
Intervention Policy

This paper discusses the role of sterilized foreign exchange (FX) interventions as a monetary policy instrument for emerging market economies in response to external shocks. We develop a model for a commodity-exporting small open economy in which FX intervention is considered as a balance sheet policy induced by a financial friction in the form of an agency problem between banks and their creditors. The severity of banks agency problem depends directly on a bank-level measure of currency mismatch. Endogenous deviations from the standard UIP condition arise at equilibrium. In this context, FX interventions moderate the response of financial and macroeconomic variables to external shocks by leaning against the wind with respect to real exchange rate pressures. Our quantitative results indicate that, conditional on external shocks, the FX intervention policy successfully reduces credit, investment, and output volatility, along with substantial welfare gains when compared to a free-floating exchange rate regime. Finally, we explore distinct generalizations of the model that eliminate the presence of endogenous UIP deviations. In those cases, FX intervention operations are considerably less effective for the aggregate equilibrium.

scholarly journals Constructing a Financial Condition Index for a Small-Open Economy: The Case of Malta

2018 ◽  
Vol 10 (3) ◽  
pp. 89
Author(s):  
Borg Ian ◽  
Micallef Brian
Keyword(s):  
Interest Rates ◽  
Open Economy ◽  
Small Open Economy ◽  
Balance Sheet ◽  
Principal Component ◽  
Condition Index ◽  
Predictive Capacity ◽  
Financial Variables ◽  
Financial Condition ◽  
Financial Conditions

This paper develops a Financial Conditions Index (FCI) for Malta for the period 1996-2017. This index provides a summary measure of financial conditions by combining several financial variables, both domestic and foreign, that influence economic activity. The indicators in the FCI are grouped in four categories: interest rates, bank balance sheet, asset prices and external variables. The weights are derived using Principal Component Analysis (PCA) and cross-checked using simulations from STREAM, the Central Bank of Malta’s macro-econometric model. Financial conditions in Malta were relatively benign in the mid-to-late 90s, followed by a period of tightening in the early 2000s. Financial conditions improved again during the pre-crisis period but deteriorated during the financial crisis and remained tight until 2013. In recent years these have recovered and became broadly neutral by 2017. The proposed FCIs correlate the most with one to three quarters ahead real GDP growth, suggesting potential predictive capacity for short-term forecasting.

Forecasting with a DSGE Model of a Small Open Economy within the Monetary Union

2014 ◽  
Vol 33 (5) ◽  
pp. 315-338 ◽  
Author(s):  
Massimiliano Marcellino ◽  
Yuliya Rychalovska
Keyword(s):  
Monetary Union ◽  
Open Economy ◽  
Small Open Economy ◽  
Dsge Model

scholarly journals Don't Put All Your Eggs in Foreign Baskets

Económica ◽  
2020 ◽  
Vol 66 ◽  
pp. 016
Author(s):  
Santiago Camara
Keyword(s):  
Exchange Rate ◽  
Open Economy ◽  
Financial Crises ◽  
Small Open Economy ◽  
Balance Sheet ◽  
Firm Level ◽  
Present Evidence ◽  
Exporting Firms ◽  
Balance Sheet Effects ◽  
Level Data

I analyze the sluggish response of exports during and after financial crises using firm level data for two countries-episodes: Argentina 2001 and Peru 1998 crises. I find that both incumbent exporting firms do not expand and that there’s no significant entry of new exporting firms. Furthermore, I present evidence that suggests that the export elasticity to the real exchange rate is asymmetric, smaller for depreciations than for appreciations. I build and estimate a DSGE model for a small open economy where exporting entrepreneurs are subject to financial frictions and balance sheet effects in order to try and explain these stylized facts. Although these frictions decrease the response of exports to movements in the exchange rate, I use computational exercises to show that they are not enough to explain the empirical results.

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