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Monetary Policy and Exchange Rate Interactions in a Small Open Economy

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  • "Hilde C." "Bjørnland"

Abstract

The transmission mechanisms of monetary policy in a small open economy like Norway are analysed through structural VARs, with special emphasis on the interdependence between monetary policy and exchange rate movements. By imposing a long-run neutrality restriction on the real exchange rate, thereby allowing the interest rate and the exchange rate to react simultaneously to news, I find considerable interdependence between monetary policy and the exchange rate. In particular, following a contractionary monetary policy shock, the real exchange rate immediately appreciates, after which it gradually depreciates back to the baseline. The results are found to be consistent with findings from an "event study". Copyright � The editors of the "Scandinavian Journal of Economics" 2008 .

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

Volume (Year): 110 (2008)
Issue (Month): 1 (03)
Pages: 197-221

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Handle: RePEc:bla:scandj:v:110:y:2008:i:1:p:197-221

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Cited by:
  1. Cover, James P. & Mallick, Sushanta K., 2012. "Identifying sources of macroeconomic and exchange rate fluctuations in the UK," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1627-1648.
  2. Hilde C. Bjørnland, 2009. "Monetary policy and exchange rate overshooting: Dornbusch was right after all," Working Paper 2009/09, Norges Bank.
  3. Bjørnland, Hilde C. & Jacobsen, Dag Henning, 2010. "The role of house prices in the monetary policy transmission mechanism in small open economies," Journal of Financial Stability, Elsevier, vol. 6(4), pages 218-229, December.
  4. Hilde C. Bjørnland, 2005. "Monetary policy and the illusionary exchange rate puzzle," Working Paper 2005/11, Norges Bank.
  5. Gunji, Hiroshi & Miura, Kazuki & Yuan, Yuan, 2009. "Bank competition and monetary policy," Japan and the World Economy, Elsevier, vol. 21(1), pages 105-115, January.

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