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Portfolio shocks and the financial accelerator in a small open economy

Ortiz, Marco and Miyahara, Ken (2022): Portfolio shocks and the financial accelerator in a small open economy.

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Abstract

We study a small open economy with two salient properties: an entrepreneurial sector that borrows in foreign currency and is subject to costly state-verification and risk averse FX market intermediaries. This economy thus features a financial accelerator, an endogenous expected cost of capital, and foreign exchange dynamics dependent on the open position of financial intermediaries. we aim to quantitatively assess the extent to which portfolio shocks can reproduce contractionary depreciations and how central bank's optimal simple rules can improve welfare in a stylized economy.

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