Bank of Mexico paper backs credit multiplier as amplification mechanism in DSGE


A working paper published by the Bank of Mexico argues that credit multipliers are indeed producing the expected amplification of shocks when included in dynamic stochastic general equilibrium (DSGE) models.

The paper, Re-examining the Role of Financial Constraints in Business Cycles, by Virginia Olivella and Jessica Roldán-Peña, tests a closed economy and a small open economy, showing that rather than the credit multiplier failing, general equilibrium effects are dampening the amplification

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