Inspecting Monetary Policy Rules in a Small Open Economy with Financial Frictions
In this paper, we address how the monetary authority should react to financial market status and exchange rates movements in a small open economy New Keynesian model with financial frictions due to asymmetric information between savers and borrowers. We show that the small economy with financial fri...
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| Format: | Article |
| Language: | English |
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Korea Institute for International Economic Policy
2023-06-01
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| Series: | East Asian Economic Review |
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| Summary: | In this paper, we address how the monetary authority should react to financial market status and exchange rates movements in a small open economy New Keynesian model with financial frictions due to asymmetric information between savers and borrowers. We show that the small economy with financial frictions is more susceptible to the exogenous shocks under the fixed exchange rate regime than under the flexible exchange regime. The small economy experiences a more prolonged and deeper economic recession under the fixed exchange rate regime than under the flexible exchange rate regime. The monetary policy taking into account external finance premium is better than the interest rate rule without considering the financial market status. |
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| ISSN: | 2508-1640 2508-1667 |