Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/257361 
Authors: 
Year of Publication: 
2021
Citation: 
[Journal:] Economies [ISSN:] 2227-7099 [Volume:] 9 [Issue:] 4 [Article No.:] 203 [Publisher:] MDPI [Place:] Basel [Year:] 2021 [Pages:] 1-26
Publisher: 
MDPI, Basel
Abstract: 
Empirical evidence demonstrates that credit standards, including lending margins and collateral requirements, move in a countercyclical direction. In this study, we construct a small open economy model with financial frictions to generate the countercyclical movement in credit standards. Our analysis demonstrates that countercyclical fluctuations in credit standards work as an amplifier of shocks to the economy. In particular, the existence of endogenous credit standards increases output volatility by 21%. We also suggest three alternative tools for policymakers to dampen the effects of endogenous credit standards on macroeconomic volatility. First, the introduction of credit growth to the monetary policy succeeds in counteracting the fluctuation of lending, and thus decreasing the additional volatility considerably. Second, the exchange rate augmented monetary policy, if well-constructed, is considered an efficient tool to eliminate most of the additional fluctuations caused by deep habits in the banking sector. Finally, the introduction of the foreign interest augmented policy also proves successful in dampening the effect of endogenous movements in lending standards.
Subjects: 
aggregate fluctuations
collateral requirements
credit standards
deep habits
DSGE modeling
monetary policy
small open economy
JEL: 
E12
E22
E23
E31
E32
E44
F34
F41
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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