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 Economics 58 (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.
The B.E. Journal of Macroeconomics – de Gruyter
Published: Oct 11, 2017
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