The effects of bank lending in an open economy

This article assesses the effects of bank lending in a small open economy with a floating exchange rate and sticky prices. A theoretical model with costly financial intermediation is developed for New Zealand. The results show that the long-run and business cycle effects of bank lending are small. Whether firms borrow from financial intermediaries or public debt markets is unlikely to affect economic activity. In other words, the financial structure, or degree to which a country's financial system is intermediary based or market based, does not matter. JEL codes: E32, E44, E50, F41 Keywords: financial intermediation, open economy, general equilibrium model.
THIS ARTICLE DEVELOPS a dynamic general equilibrium model to assess the effects of bank lending in an open economy. It is motivated by empirical evidence that credit markets may exacerbate [...]