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Author(s) / Editor(s): 
  • Martha López
  • Juan David Prada
  • Norberto Rodríguez

Financial Accelerator Mechanism in a Small Open Economy

Using Bayesian estimation techniques, we estimate a small open economy DSGE model with credit-market imperfections for the Colombian economy. Using the estimated model we investigate what are the sources of business cycle fluctuations. We show that balance-sheet effects play an important role in explaining recent Colombian business cycles. We then perform a counterfactual exercise that shows that fixed exchange rate regime could have exacerbated the financial distress in the economy between 1998-1999.
The views expressed in the paper are those of the authors and do not represent those of the Banco de la República or its Board of Directors.