Financial Accelerator Mechanism in a Small Open Economy
The series Working Papers on Economics is published by the Office for Economic Studies at the Banco de la República (Central Bank of Colombia). The works published are provisional, and their authors are fully responsible for the opinions expressed in them, as well as for possible mistakes. The opinions expressed herein are those of the authors and do not necessarily reflect the views of Banco de la República or its Board of Directors.
Using Bayesian estimation techniques, we estimate a small open economy DSGE model with credit-market imperfections for the Colombian economy. Using the estimated model we investigate what are the sources of business cycle fluctuations. We show that balance-sheet effects play an important role in explaining recent Colombian business cycles. We then perform a counterfactual exercise that shows that fixed exchange rate regime could have exacerbated the financial distress in the economy between 1998-1999.
The views expressed in the paper are those of the authors and do not represent those of the Banco de la República or its Board of Directors.
