The effects of Large Scale Asset Purchases on prices depend on the elasticity of aggregate demand for those assets. The aggregate elasticity reflects a combination of potentially heterogeneous elasticities of investors. In this project, we document how Quantitative Easing (QE) conducted by the ECB affected asset prices and how demand elasticities vary across investor types. Given these heterogeneous elasticities, the effects of QE on prices are smaller (larger) in magnitude for securities held more by more elastic (inelastic) investors. As purchases unfold over time the residual investor base becomes more inelastic: this evidence suggests that QE may have interesting dynamic implications and the effects of the policy may be convex rather than linear.

Dollar-denominated bank lending to small and medium-sized enterprises appears to be abundant in some emerging markets. We argue that macro outcomes following a depreciation event depend on the joint distribution of (i) firm foreign currency exposures and (ii) firm marginal propensities to invest, which can be higher for small firms. We characterize macro dynamics using a model in which firms face idiosyncratic profitability risk, liquidity constraints, and foreign currency debt revaluations. Calibrating our model to data from Peru, we find that depreciations are costlier for investment than in a model that considers only a representative firm.

Website: https://canvas.harvard.edu/courses/107387

Contact: Jamie Murray

Contact email: jamiemurray@fas.harvard.edu