External constraints on monetary policy and the financial accelerator

Mark Gertler, Simon Gilchrist, Fabio M. Natalucci

    Research output: Contribution to journalArticlepeer-review


    We develop a small open economy macroeconomic model where financial conditions influence aggregate behavior. Our goal is to explore the connection between the exchange rate regime and financial distress. We first show that a calibrated version of the model captures well the behavior of the Korean economy during its financial crisis period of 1997-98. In particular, the model accounts for the sharp increase in lending rates and the large drop in output, employment, investment, and measured productivity. The financial market frictions play an important role, further, explaining roughly half the decline in overall economic activity. We then perform some counterfactual exercises to illustrate how the fixed exchange rate regime likely exacerbated the crisis by tying the hands of monetary policy.

    Original languageEnglish (US)
    Pages (from-to)295-330
    Number of pages36
    JournalJournal of Money, Credit and Banking
    Issue number2-3
    StatePublished - Mar 2007


    • Exchange rate policy
    • Financial crises

    ASJC Scopus subject areas

    • Accounting
    • Finance
    • Economics and Econometrics


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