TY - JOUR AU - Céspedes, Luis Felipe AU - Chang, Roberto AU - Velasco, Andrés TI - Financial Intermediation, Exchange Rates, and Unconventional Policy in an Open Economy JF - National Bureau of Economic Research Working Paper Series VL - No. 18431 PY - 2012 Y2 - October 2012 DO - 10.3386/w18431 UR - http://www.nber.org/papers/w18431 L1 - http://www.nber.org/papers/w18431.pdf N1 - Author contact info: Luis Felipe Céspedes Universidad de Chile Departamento de Economía E-Mail: lfcespedes@fen.uchile.cl Roberto Chang Rutgers University Department of Economics 75 Hamilton Street New Brunswick, NJ 08901 Tel: 732/932-7269 Fax: 732/932-7416 E-Mail: chang@econ.rutgers.edu Andrés Velasco School of Public Policy London School of Economics and Political Science Houghton Street London WC2A 2AE United Kingdom Tel: +4420 7955 7982 E-Mail: A.Velasco1@lse.ac.uk M1 - published as Luis Felipe Céspedes, Roberto Chang, Andrés Velasco. "Financial Intermediation, Real Exchange Rates, and Unconventional Policies in an Open Economy," in Richard Clarida, Lucrezia Reichlin, and Michael Devereux, organizers, "NBER International Seminar on Macroeconomics 2016" Journal of International Economics, Volume 108, Supp. 1 (Elsevier) (2017) AB - This paper develops an open economy model in which financial intermediation is subject to occasionally binding collateral constraints, and uses the model to study unconventional policies such as credit facilities and foreign exchange intervention. The model highlights the interaction between the real exchange rate, interest rates, and financial frictions. The exchange rate can affect the financial intermediaries' international credit limit via a net worth effect and a leverage ratio effect; the latter is novel and depends on the equilibrium link between exchange rates and interest spreads. Unconventional policies are nonneutral if and only if financial constraints are binding in equilibrium. Credit programs are more effective if targeted towards financial intermediaries rather than the corporate sector. Sterilized foreign exchange interventions matter because the increased availability of tradables, resulting from the sterilizing credit, can relax financial frictions; this perspective is new in the literature. Finally, self fulfilling expectations can lead to the coexistence of financially constrained and unconstrained equilibria, justifying a policy of defending the exchange rate and the accumulation of international reserves. ER -