While autonomous central banks in large open economies are usually predisposed to use monetary rules to target inflation, output, and long-term interest rates, central banks in small open economies face peculiar challenges in their attempts to attain and maintain liquidity, stable prices and...

We build a two-country version of the model in Gali & Monacelli (2005), which extends for a small open economy the new Keynesain DSGE model used as tool for monetary policy analysis in closed economies. A distinctive feature of the model is that the terms of trade enters directly into the new...