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The Effectiveness of Asset Purchases in Small Open Economies

Author

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  • Eliezer Borenstein

    (Bank of Israel)

  • Alex Ilek

    (Bank of Israel)

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.

Suggested Citation

  • Eliezer Borenstein & Alex Ilek, 2021. "The Effectiveness of Asset Purchases in Small Open Economies," Bank of Israel Working Papers 2021.03, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2021.03
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    File URL: https://boiwebrepec.azurefd.net/RePEc/boi/wpaper/WP_2021.03.pdf
    File Function: First version, 2021
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    Cited by:

    1. Nimrod Cohen, 2022. "Analysis of the Amplification Mechanisms in the Process of Debt Deleveraging," Bank of Israel Working Papers 2022.16, Bank of Israel.

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