Modeling with Macro-Financial Linkages: Credit and Policy Shocks in Emerging Markets
IMF Working Papers, June 1, 2009
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Bibliographic details
- Authors: Jaromir Benes, Inci Ötker, David Vávra
- Published: June 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451872705.001
Summary
- Develops a stylized, small, open economy macro model that incorporates an explicit and non-trivial role for financial intermediation.
- Illustrates use of the model for policy analysis in an emerging market economy facing:
- rapid credit growth,
- financial dollarization,
- foreign borrowing,
- limited traditional monetary policy transmission.
- Emphasizes alternative instruments policymakers could use: foreign exchange market intervention and regulatory and administrative measures.
- Calibrated to a stylized emerging European economy to simulate real and financial sector implications of various external and policy-related shocks for monetary policy input.
Model calibration and simulations
- Calibration: stylized emerging European economy (no further numeric calibration values provided in the source).
- Simulations explore:
- real sector implications of external and policy shocks,
- financial sector implications of external and policy shocks,
- interactions between credit dynamics, dollarization, and foreign borrowing under constrained monetary transmission.
Findings and scenarios
- The model highlights the non-trivial role of financial intermediation in transmitting shocks in emerging market settings.
- Rapid credit growth, financial dollarization, and foreign borrowing are identified as key vulnerabilities that shape macrofinancial responses to shocks.
- In contexts where monetary policy transmission is weak, more direct measures (foreign exchange intervention; regulatory and administrative measures) are viable policy tools analyzed by the model.
Policy recommendations and use for policymakers
- Use calibrated macro-financial models as input for monetary policy making in emerging markets.
- Consider deploying direct instruments when traditional monetary policy channels are ineffective:
- foreign exchange market intervention,
- regulatory measures,
- administrative measures.
- Monitor credit growth, degree of dollarization, and foreign borrowing as central indicators of financial sector vulnerability.