A considerable body of theoretical and empirical literature has evaluated the credit channel of monetary transmission. This paper sets up an open-economy model under floating exchange rates with imperfect international capital mobility based on the Bernanke and Blinder model (1988). Employing our model, we show that a change in money supply has different impacts on the economy in many cases compared to the previous literature. The exchange rate puzzle may occur and when the exchange rate puzzle appears, the Fleming proposition is violated. Besides, by means of a cointegration analysis, we empirically verify the particular case of the exchange rate puzzle with the monthly data from May 1984 to January 2005 in Taiwan. Therefore, our empirical evidences can be matched with our theoretical derivations successfully.

Abrams, B. A. and F. R. Settle (2003), “Do Fixed Exchange Rates Fetter Monetary Policy? A Credit View,” NBER Working Papers, No. 2003-09.

Bernanke, B. S. (1983), “Non-monetary Effects of the Financial Crisis in the Propagation of the Great Depression,” American Economic Review, Vol. 73, No.3, pp. 257-276.

Bernanke, B. S. and S. A. Blinder (1988), “Credit, Money, and Aggregate Demand,” American Economic Review, Vol. 78, No.2, pp. 435-440.

Bernanke, B. S. and S. A. Blinder (1992), “The Federal Fund Rate and the Channels of Monetary Transmission,” American Economic Review, Vol. 82, No. 4, pp. 901-921.

Bernanke, B. S. and M. Gertler (1995), “Inside the Black Box: the Credit Channel of Monetary Policy Transmission,” Journal of Economic Perspectives, Vol. 9, No. 4, pp. 27-48.

Blinder, A. S. and J. E. Stiglitz (1983), “Money, Credit Constraints, and Economic Activity,” American Economy Review, Vol. 73, No. 2, pp. 297-302.

Brunner, K. and A. H. Meltzer (1968), “Liquidity Traps for Money, Bank Credit, and Interest Rates,” Journal of Political Economy, Vol. 76, No. 1, pp. 1-37.

Chiades, P. and L. Gambacorta (2004), “The Bernanke and Blinder Model in an Open Economy: The Italian Case,” German Economic Review, Vol. 5, No. 1, pp. 1-34.

Dickey, D. A. and W. A. Fuller (1979), “Distribution of Estimators for Autoregressive Time Series with a Unit root,” Journal of the American Statistical Association, Vol. 74, No. 366, pp. 427-431.

Dickey, D. A. and W. A. Fuller (1981), “Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root,” Econometrica, Vol. 49, No. 4, pp. 1057-1072.

Eichengreen, B. (1997), “Golden Fetters: The Gold Standard and the Great Depression,” NBER working paper, No. 6060.
Eichengreen, B. (2002), “Still Fettered After All These Years,” NBER Working Papers No. 9276.

Friedman, B. M. (1981), “The Relative Stability of Money and Credit Velocities in the United States: Evidence and Some Speculations,” NBER working paper, No. 645.

Friedman, B. M. (1982), “Debt and Economic Activity in the United States,” NBER working paper, No. 704.

Friedman, B. M. (1983b), “Monetary Policy with a Credit Aggregate Target,” NBER working paper, No. 980.

Fleming, J. M. (1962), “Domestic Financial Policies under Fixed and Floating Exchange Rates,” IMF Staff Papers, Vol. 9, pp. 369-379.

Gertler, M. and S. Gilchrist (1993), “The Role of Credit Market Imperfections in the Monetary Transmission Mechanism: Arguments and Evidence,” Scandinavian Journal of Economics, Vol. 95, No.1, pp. 43-64.

Gertler, M. and S. Gilchrist (1994), “Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms,” Quarterly Journal of Economics, Vol. 109, No. 2, pp. 309-340.

Godfrey, L. (1978), “Testing against General Autoregressive and Moving Average Error Models when the Regressors Include Lagged Dependent Variables,” Econometrica, Vol. 46, No. 6, pp. 1293-1302.

Godfrey, L. (1978), “Testing for Higher Order Serial Correlation in Regression Equations when the Regressors Include Lagged Dependent Variables,” Econometria, Vol. 46, No. 6, pp. 1303-1310.

Gonzalo, J. (1994), “Five Alternative Methods of Estimating Long-Run Equlibrium Relationships,” Journal of Econometrics, Vol. 60, No. 1-2, pp. 203-233.

Johansen, S. (1988), “Statistical Analysis of Cointegration Vectors,” Journal of Economic Dynamics and Control, Vol. 12, pp. 231-254.

Johansen, S. and K. Juselius (1990), “Maximum Likelihood Estimation and Inference on Cointegration-with Applications to the Demand for Money,” Oxford Bulletin of Economics and Statistics, Vol. 52, No.2, pp. 169-210.

Johansen, S. (1991), “Estimation and Hypothesis Testing of Cointegrating Vectors in Gaussian Vector Autoregressive Models,” Econometrica, Vol. 59, No.6, pp. 1551-1580.

Johansen, S. and K. Juselius (1992), “Testing Structural Hypotheses in a Multivariate Cointegration Analysis of the PPP and the UIP for UK,” Journal of Econometrics, Vol. 53, No. 1-3, pp. 211-244.

Kashyap, A. K. and J. C. Stein (1995), “The Impact of Monetary Policy on Bank Balance Sheets,” Carnegie-Rochester Conference Series on Public Policy, Vol. 42, pp. 151-195.

Kashyap, A. K., J. C. Stein and D. W. Wilcox (1993), “Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance,” American Economic Review, Vol. 83, No.1, pp. 78-98.

Ljung, G. M. and G. E. P. Box (1978), “On a Measure of Lack of Fit in Time Series Models,” Biometrika, Vol. 67, pp. 297-303.

Martson, R. C. (1985), “Stabilization Policies in Open Economies,” NBER working paper, No. 1117.

Meltzer, A. H. (1995), “Monetary, Credit and (Other) Transmission Processes: A Monetarist Prospective,” The Journal of Economic Perspectives, Vol. 9, No. 4, pp. 49-72.

Modigliani, F. and R. Miller (1958), “The Cost of Capital, Corporate Finance and the Theory of Investment,” American Economic Review, Vol. 48, No. 3, pp. 261-297.

Mundell, R. A. (1963), “Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates,” Canadian Journal of Economics, Vol. 15, No.4, pp. 87-103.

Patinkin, D. (1956), Money, Interest, and Prices, New York: Harper and Row.
Pill, H. (1997), “Bank Behaviour and Monetary Policy in a Small Open Economy: the Case of Spain,” Graduate School of Business Administration Harvard University.

Poole, W. (1970), “Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model,” The Quarterly Journal of Economics, Vol. 84, No. 2, pp. 197-216.

Romer, C. D. and D. H. Romer (1990), “New Evidence on the Monetary Transmission Mechanism,” Brookings Papers on Economic Activity, Vol.1990, No. 1, pp. 149-213.

Samuelson, P. A. (1947), Foundation of Economic Analysis, Massa., Cambridgfe: Harvard University Press.

Stiglitz, J. E. and A. Weiss (1981), “Credit Rationing in Markets with Imperfect Information,” American Economy Review, Vol. 71, No.3, pp. 393-410.

Swoboda, A. K. (1972), “Equilibrium, Quasi-Equilibrium, and Macroeconomic Policy under Fixed Exchange Rates,” The Quarterly Journal of Economics, Vol. 86, No. 1, pp. 162-171.

Turnovsky, S. J. (1977), Macroeconomic Analysis and Stabilization Policies, London, Cambridge University Press.

Wu, Y. (1999), “More on Monetary Policy in a Small Open Economy: A Credit View,” Department of Economics and Finance, Franklin P. Perdue School of Business, Salisbury State University.

Wang, D. N. and G. H. Lee (2004), “The Empirical Analyses on the Monetary Policy Operations and the Transmission Mechanism in Taiwan－Concurrent Study on the Bank Credit Channel and the Stock Price Channel,” Central Bank of China Quarterly Bulletin, Vol. 26, No. 3, pp. 17-56. (in Chinese)