An Estimated Small Open Economy Model of the Financial Accelerator

28 Pages Posted: 10 Jan 2006

See all articles by Selim Ali Elekdag

Selim Ali Elekdag

International Monetary Fund (IMF) - Policy Development and Review Department

Alejandro Justiniano

International Monetary Fund (IMF) - Western Hemisphere Department

Ivan Tchakarov

International Monetary Fund (IMF) - Asia and Pacific Department

Date Written: March 2005

Abstract

This paper develops a small open economy model where entrepreneurs partially finance investment using foreign currency denominated debt subject to a risk premium above and beyond international interest rates. We use Bayesian estimation techniques to evaluate the importance of balance sheet vulnerabilities combined with the presence of the financial accelerator for emerging market countries. Using Korean data, we obtain an estimate for the external risk premium, indicating the importance of the financial accelerator and potential balance sheet vulnerabilities for macroeconomic fluctuations. Furthermore, our estimates of the Taylor rule imply a strong preference to smooth both exchange rate and interest rate fluctuations.

Keywords: Financial accelerator, balance sheets, Bayesian estimation of DSGE models, Taylor rules

JEL Classification: C11, F41

Suggested Citation

Elekdag, Selim Ali and Justiniano, Alejandro and Tchakarov, Ivan, An Estimated Small Open Economy Model of the Financial Accelerator (March 2005). IMF Working Paper No. 05/44, Available at SSRN: https://ssrn.com/abstract=874266

Selim Ali Elekdag (Contact Author)

International Monetary Fund (IMF) - Policy Development and Review Department ( email )

700 19th St. NW
Washington, DC 20431
United States

Alejandro Justiniano

International Monetary Fund (IMF) - Western Hemisphere Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Ivan Tchakarov

International Monetary Fund (IMF) - Asia and Pacific Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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