Banks and Monetary Shocks in Emerging Markets: How Far Can We Go with the "Credit View"?

IMF Working Papers, March 1, 2000

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Banks and Monetary Shocks in Emerging Markets: How Far Can We Go with the "Credit View"?

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Bibliographic details

• Authors: Luis Catão, Sergio L. Rodriguez
• Published: March 1, 2000
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451848984.001

Model framework

• Two-good optimizing macromodel with costly domestic banking activity.
• Non-tradable sector is highly dependent on domestic bank credit, reflecting conditions in most emerging market economies.
• Implements the Bernanke-Blinder “credit view” of the monetary transmission mechanism along classical lines:
  • No Keynesian rigidities are imposed.
  • The only sources of “imperfection” are deposit and credit-in-advance constraints.
• Numerical simulations are used to study propagation of monetary shocks.

Main analytical findings and results from simulations

• A relatively simple model with costly banking and credit-dependent non-tradables "goes a long way" toward explaining key “stylized facts” of recent financial crises.
• The model develops channels through which monetary shocks are propagated via banking frictions and working capital needs in the non-tradable sector.
• Emphasizes the role of deposit and credit-in-advance constraints in amplifying monetary policy shocks in emerging market contexts.

Policy-relevant implications (as framed by the paper)

• Understanding monetary transmission in emerging markets requires accounting for banking costs and the dependence of non-tradable sectors on bank credit.
• The Bernanke-Blinder “credit view” provides a useful framework even without introducing Keynesian nominal rigidities, highlighting the importance of credit supply constraints for macroeconomic outcomes following monetary shocks.

Subjects and keywords

• Subjects: Bank credit; Banking; Consumption; Credit; Emerging and frontier financial markets; Employment; Financial markets; Labor; Money; National accounts.
• Keywords: Asia and Pacific; Bank credit; Consumption; Credit; demand curve; Emerging and frontier financial markets; emerging markets; Employment; flow constraint; interest rate; interest rate shock; interest rate spreads; monetary policy; open economy; present discounted value; trade balance; working capital; WP.

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• Banks and Monetary Shocks in Emerging Markets: How Far Can We Go With the "Credit View"? - WP/00/68
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