TY  - JOUR
AU  - Gertler,Mark
AU  - Gilchrist,Simon
AU  - Natalucci,Fabio
TI  - External Constraints on Monetary Policy and the Financial Accelerator
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10128
PY  - 2003
Y2  - December 2003
UR  - http://www.nber.org/papers/w10128
L1  - http://www.nber.org/papers/w10128.pdf
N1  - Author contact info:
Mark Gertler
Department of Economics
New York University
269 Mercer Street, 7th Floor
New York, NY 10003
Tel: 212/998-8931
Fax: 212/995-4186
E-Mail: mark.gertler@nyu.edu

Simon Gilchrist
Department of Economics
Boston University
270 Bay State Road
Boston, MA  02215
Tel: 617/353-6824
Fax: NA
E-Mail: sgilchri@bu.edu

Fabio Natalucci
Federal Reserve Board
20th St. and Constitution Ave.
Washington, DC 20551
E-Mail: fabio.m.natalucci@frb.gov
AB  - We develop a small open economy macroeconomic model where financial conditions influence aggregate behavior. We use this model to explore the connection between the exchange rate regime and financial distress. We show that fixed exchange rates exacerbate financial crises by tieing the hands of the monetary authorities. We then investigate the quantitative significance by first calibrating the model to Korean data and then showing that it does a reasonably good job of matching the Korean experience during its recent financial crisis. In particular, the model accounts well for the sharp increase in lending rates and the large drop in output, investment and productivity during the 1997-1998 episode. We then perform some counterfactual exercises to illustrate the quantitative significance of fixed versus floating rates both for macroeconomic performance and for welfare. Overall, these exercises imply that welfare losses following a financial crisis are significantly larger under fixed exchange rates relative to flexible exchange rates.
ER  -