A Macro Model of the Credit Channel in a Currency Union Member: The Case of Benin
27 Pages Posted: 24 Aug 2010
Date Written: August 2010
This paper applies and extends a theoretical model built by Agénor and Montiel (2007) by exploring the effectiveness of government bonds and monetary policy in a small, open, credit-based economy with a fixed exchange rate. The model is applied to Benin, a member of a currency union, using a general equilibrium model with stochastic simulation. Model calibration replicates the historical pattern for 1996–2009. Policy experiments simulated an increase in government securities in Benin’s regional market and a cut in the reserve requirement. Simulations produced mixed results. It appears that, among other factors, excess bank liquidity lowers the effectiveness of monetary policy instruments through the credit channel and that government bonds can help mop up excess bank liquidity.
Keywords: Benin, Bonds, Central bank policy, Credit, Economic models, Excess liquidity, Financial sector, Monetary policy, Monetary transmission mechanism, Monetary unions, Reserves, Sovereign debt, West African Economic and Monetary Union
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