The Impacts of Credit Standards on Aggregate Fluctuations in a Small Open Economy: The Role of Monetary Policy

Empirical evidence demonstrates that credit standards, including lending margins and collateral requirements, move in a countercyclical direction. In this study, we construct small open economy model with financial frictions to generate the movement standards. Our analysis fluctuations standards work as an amplifier of shocks economy. particular, existence endogenous increases output volatility by 21%. We also suggest three alternative tools for policymakers dampen effects on macroeconomic volatility. First, introduction growth monetary policy succeeds counteracting fluctuation lending, thus decreasing additional considerably. Second, exchange rate augmented policy, if well-constructed, is considered efficient tool eliminate most caused deep habits banking sector. Finally, foreign interest proves successful dampening effect movements