Banks and Macroeconomic Disturbances Under Predetermined Exchange Rates

50 Pages Posted: 4 Sep 1997

See all articles by Sebastian Edwards

Sebastian Edwards

University of California, Los Angeles (UCLA) - Global Economics and Management (GEM) Area; National Bureau of Economic Research (NBER)

Carlos A. Vegh

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS); University of Maryland - Department of Economics; University of California at Los Angeles; National Bureau of Economic Research (NBER)

Date Written: July 1997

Abstract

As the recent Mexican crisis vividly illustrates, Latin American countries often go through boom-bust cycles caused by both domestic policies and external shocks. Such cycles are typically magnified by weak banking systems which intermediate large capital inflows. This paper develops a simple optimizing model to analyze how the banking sector affects the propagation of shocks. In particular, we show how the world business cycle and shocks to the banking system affect output and employment through fluctuations in bank credit. We also analyze the countercyclical use of reserve requirements. Econometric evidence for Chile and Mexico supports the main predictions of the model.

JEL Classification: E62, N26

Suggested Citation

Edwards, Sebastian and Vegh, Carlos A., Banks and Macroeconomic Disturbances Under Predetermined Exchange Rates (July 1997). Available at SSRN: https://ssrn.com/abstract=11320 or http://dx.doi.org/10.2139/ssrn.11320

Sebastian Edwards

University of California, Los Angeles (UCLA) - Global Economics and Management (GEM) Area ( email )

110 Westwood Plaza
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Los Angeles, CA 90095-1481
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National Bureau of Economic Research (NBER)

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Carlos A. Vegh (Contact Author)

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

1740 Massachusetts Avenue, NW
Washington, DC 20036-1984
United States

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

University of California at Los Angeles ( email )

Box 951477
Los Angeles, CA 90095-1477
United States
310-825-7371 (Phone)
310-825-9528 (Fax)

HOME PAGE: http://vegh.sscnet.ucla.edu

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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