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Welfare Effect of Productivity Shocks and Policy Implications in a Small Open Economy

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AbstractWe examine the welfare effect and policy implications of productivity shocks in a small open economy. With real business cycle models, productivity shocks are generally welfare improving. However, once we assign a big role to financial frictions, productivity shocks may become welfare deteriorating. These results are robust. Moreover, the policy implication hinges on preferences, policy specifications, and financial frictions.

Affiliations: 1: Department of Economics, East Carolina University Brewster A-427, Greenville, NC 27858, Email:, URL:; 2: Department of Economics, East Carolina University Brewster A-432, Greenville, NC 27858, Email:, URL:


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