Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/144458
Authors: 
Pirovano, Mara
Year of Publication: 
2013
Series/Report no.: 
Working Paper Research 246
Abstract: 
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.
Subjects: 
DSGE model
capital inflows
financial frictions
liability dollarization
financial stability
JEL: 
E44
E47
E52
F41
F47
Document Type: 
Working Paper

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