Page 104 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.82, # 2, 2025, pp. 96-116

inherits variations from . A reduction in due to SDC outflows thus reduces

lending unless recycled.

Central bank recycling and multiplier on credit
If the central bank recycles SDC liabilities by purchasing government bonds and then
financing bank lending (or directly lending), the contractionary effect is dampened.
Denote recycling parameter ∈ [0,1], the share of SDC inflows the central bank uses
to restore bank funding:
= (1 − ) . (12)

When γ=1, no net disintermediation occurs; when γ=0, the full deposit outflow
reduces banks’ lending proportional to θ.

CALIBRATION
This section documents the baseline parameter choices used in the paper, the simple
steady-state mapping used for reduced-form intuition, and a compact robustness
sweep. The calibration is illustrative for a representative small open economy and is
chosen to make model comparative-statics transparent. In Section 5.1, we also provide
specific directions for calibrating models of small open economies.

Table 1: Baseline parameters (used throughout this paper unless stated otherwise)

Parameter Symbol Baseline
Discount factor 0.99
Policy nominal rate (steady) 0.02
SDC remuneration (baseline) 0.01

Deposit elasticity 6

Intermediate capacity 0.8
Recycling share 0.6
Intertemporal elasticity (inv) 1

Calvo stickiness — moderate
Source: Compiled by the authors

β and σ are standard (log utility). and are steady nominal benchmarks with the

SDC rate set below the policy rate in the baseline. θ captures the “shallowness” of
bank intermediation (how many units of loans per unit funding); γ captures the share
of SDC inflows the central bank recycles back to banks via asset purchases / lending
operations.

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