Household and firm leverage, capital flows and monetary policy in a small open economy

Arbeitspapier

This paper outlines a framework for analysing the interaction between financial frictions at the household and firm level, liability dollarization and optimal monetary policy in a small, open economy subject to productivity and capital inflow shocks. It is found that, first, for the shocks under review, the extent of co-movement of financial variables pertaining to entrepreneurs and homeowners crucially depends on the degree of exchange rate flexibility. Second, for a central bank not concerned with financial stability, reacting to inflation and output is considered optimal. Third, including financial stability in the central bank's objectives results in an optimal monetary policy rule reacting to exchange rate depreciation, but not to credit growth, even in the case of large capital inflow shocks. In fact, reacting to credit growth reinforces the initial shock, increasing financial imbalances.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: NBB Working Paper ; No. 246

Classification and Topics

• Classification: Wirtschaft ; Financial Markets and the Macroeconomy ; Money and Interest Rates: Forecasting and Simulation: Models and Applications ; Monetary Policy ; Open Economy Macroeconomics ; Macroeconomic Aspects of International Trade and Finance: Forecasting and Simulation: Models and Applications
• Subject: DSGE model ; capital inflows ; financial frictions ; liability dollarization ; financial stability ; Kapitalimport ; Schock ; Flexibler Wechselkurs ; Geldpolitik ; Dynamisches Gleichgewicht

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Pirovano, Mara
• Event: Veröffentlichung
• (who): National Bank of Belgium
• (where): Brussels
• (when): 2013

Further information

• Handle: http://hdl.handle.net/10419/144458
• Last update: 10.03.2025, 11:43 AM CET