Financial accelerator mechanism in a small open economy

Abstract

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.

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