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Monetary Policy and the Exchange Rate: The Role of Openness

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  • Karras Georgios

Abstract

This paper examines whether the effects of monetary police on the exchange rate depend on the openness of the economy. Theoretically, openness can be shown to have an ambiguous effect on the ability of money to influence the exchange rate, so the issue has to be resolved empirically. Using annual data from the 1953-1990 period for a panel of 37 countries, the empirical results indicate that the effects of monetary policy on the exchange rate are negatively affected by the economy' s openness. Therefore, the more open the economy, the smaller the (short-run) depreciation effects of a given increase in the money growth rate (in the long run, relative PPP applies). This finding is robust to a number to different specifications. [E52, F41]

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal International Economic Journal.

Volume (Year): 13 (1999)
Issue (Month): 2 ()
Pages: 75-88

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Handle: RePEc:taf:intecj:v:13:y:1999:i:2:p:75-88

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  1. Turnovsky, Stephen J & Basar, Tamer & d'Orey, Vasco, 1988. "Dynamic Strategic Monetary Policies and Coordination in Interdependent Economies," American Economic Review, American Economic Association, vol. 78(3), pages 341-61, June.
  2. Cover, James Peery, 1992. "Asymmetric Effects of Positive and Negative Money-Supply Shocks," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1261-82, November.
  3. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  4. David Romer, 1991. "Openness and inflation: theory and evidence," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  5. Dornbusch, Rudiger & Giovannini, Alberto, 1990. "Monetary policy in the open economy," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 23, pages 1231-1303 Elsevier.
  6. Karras, Georgios, 1994. "Macroeconomic effects of budget deficits: further international evidence," Journal of International Money and Finance, Elsevier, vol. 13(2), pages 190-210, April.
  7. Turnovsky, Stephen J, 1981. "Monetary Policy and Foreign Price Disturbances under Flexible Exchange Rates: A Stochastic Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 13(2), pages 156-76, May.
  8. R. Barrell & R. Anderton & G.M. Caporale & J.W. in't Veld, 1993. "The World Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 145(1), pages 43-63, August.
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