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The Impact of Monetary Policy on Financial Markets in Small Open Economies: More or Less Effective During the Global Financial Crisis?

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Author Info

  • Pennings, Steven

    ()
    (Department of Economics)

  • Ramayandi, Arief

    ()
    (Asian Development Bank)

  • Tang, Hsiao Chink

    ()
    (Asian Development Bank)

Abstract

This paper estimates the impact of monetary policy on exchange rates and stock markets for eight small open economies: Australia, Canada, the Republic of Korea, New Zealand, the United Kingdom, Indonesia, Malaysia and Thailand. On average across these countries, a one percentage point surprise rise in official interest rates leads to a 1% appreciation of the exchange rate and a 1% fall in stock market indices. The effect on exchange rates is notably weaker in the non-Organization for Economic Cooperation and Development (OECD) countries with a managed float. For the OECD countries, there is no robust evidence of a change in the effect of policy during the global financial crisis. For the non-OECD countries, there is some evidence of a stronger effect of policy on stock markets during the crisis, although further research is needed to investigate whether this is a result of measurement issues.

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File URL: http://aric.adb.org/pdf/workingpaper/WP72_Pennings_Impact_of_Monetary_Policy.pdf
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Bibliographic Info

Paper provided by Asian Development Bank in its series Working Papers on Regional Economic Integration with number 72.

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Length: 56 pages
Date of creation: 01 Jan 2011
Date of revision:
Handle: RePEc:ris:adbrei:0072

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Keywords: Monetary policy effectiveness; exchange rate; stock prices; crisis; Asian economies;

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  1. Monika Piazzesi & Eric T. Swanson, 2006. "Futures prices as risk-adjusted forecasts of monetary policy," Working Paper Series 2006-23, Federal Reserve Bank of San Francisco.
  2. Leon Berkelmans, 2005. "Credit and Monetary Policy: An Australian SVAR," RBA Research Discussion Papers rdp2005-06, Reserve Bank of Australia.
  3. Jon Wongswan, 2005. "The response of global equity indexes to U.S. monetary policy announcements," International Finance Discussion Papers 844, Board of Governors of the Federal Reserve System (U.S.).
  4. Jonathan Kearns & Phil Manners, 2006. "The Impact of Monetary Policy on the Exchange Rate: A Study Using Intraday Data," International Journal of Central Banking, International Journal of Central Banking, vol. 2(4), December.
  5. Cho‐Hoi Hui & Hans Genberg & Tsz‐Kin Chung, 2011. "Funding liquidity risk and deviations from interest‐rate parity during the financial crisis of 2007–2009," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 16(4), pages 307-323, October.
  6. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
  7. Kim, Suk-Joong & Nguyen, Do Quoc Tho, 2009. "The spillover effects of target interest rate news from the U.S. Fed and the European Central Bank on the Asia-Pacific stock markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(3), pages 415-431, July.
  8. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  9. Markus K. Brunnermeier & Stefan Nagel & Lasse H. Pedersen, 2009. "Carry Trades and Currency Crashes," NBER Chapters, in: NBER Macroeconomics Annual 2008, Volume 23, pages 313-347 National Bureau of Economic Research, Inc.
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Cited by:
  1. Moayedi, Vafa & Aminfard, Matin, 2011. "The Impact of Policy Shocks on Financial Structure: Empirical Results from Japan," MPRA Paper 39185, University Library of Munich, Germany.
  2. Muhammad Ali Nasir & Alaa M. Soliman, 2014. "Aspects of Macroeconomic Policy Combinations and Their Effects on Financial Markets," Economic Issues Journal Articles, Economic Issues, vol. 19(1), pages 95-118, March.

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