Discussion of “On the Quantitative Effects of Unconventional Monetary Policies in Small Open Economies”∗

This paper contributes to the expanding literature on unconventional monetary policies. So far, much of the literature has focused on advanced economies. This may be natural because the United States and the European Union are the sources of the current crisis. However, many emerging markets have also been affected by the current crisis, and their central banks have employed unconventional policies. The paper is one of the earliest papers that consider unconventional monetary policies for an emerging economy. Garćıa-Cicco modified the standard small open New Keynesian model by incorporating several frictions thatmotivate unconventional monetary policy. Those are as follows: the liquidity premium between the money market rate and short-term government bonds, the deviation from uncovered interest rate parity (UIP), and the term premium of long-term government bonds. The deviation from UIP may arise from costly adjustment of international portfolio. The term premium may arise from imperfect substitutability between longand short-term bonds. It is assumed that policy instruments affect those friction terms directly. An increase in basemoney decreases the liquidity premium, the provision of foreign reserve affects the UIP condition, and the relative supply of long and short bonds affects the term premium. Even though those are assumed without microfoundations, it seems that those assumptions are reasonable. Financial frictions are estimated using Chilean data, and the estimated coefficients are interpreted as representing policy multipliers. The paper considers four policy instruments: the money market rate, base money, supply of long and short bonds, and foreign