07/01/2021
| Borenstein Eliezer, Ilek Alex
Abstract
We
examine the potential effectiveness of asset purchases (AP) in small open economies.
To that end we extend the model of Gertler
and Karadi (2011)
to a small open economy, in which households and firms can borrow and lend in
the global. financial market. Our results confirm a previous finding of the
literature: In a small open economy, the response of the main variables to AP
is weaker than in a closed economy. However, this weaker response does not
necessarily imply a weaker benefit of AP: We show that even in a small open
economy AP can improve welfare, and that the improvement could potentially be
larger than in a closed economy. The reason is that conducting AP allows the
economy to restore a more efficient financing structure, in the sense that it
reduces intermediation costs paid to foreign lenders.
JEL classification: E32,E44,E52,F41.
Keywords: small-open economy, unconventional monetary policy, financial
fric-tions, asset purchases, welfare. Bank of Israel. E-mail address: eliezer.borenstein@boi.org.il, alexei.ilek@boi.org.il;
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