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The impact of monetary policy on the exchange rate: evidence from three small open economies

  • Zettelmeyer, Jeromin

This paper studies the impact effect of monetary policy shocks—identified by the reaction of three month market interest rates to policy announcements—on the exchange rate in Australia, Canada, and New Zealand during the 1990s. The main results are that (1) on average, a 100 basis point contractionary shock will appreciate the exchange rate by 2-3 percent on impact; (ii) seemingly “perverse” reactions of the exchange rate to monetary policy are mainly attributable to reverse causality; (iii) in a few instances, there were true “perverse” reactions of exchange rates to policy— generally, appreciations following expansionary shocks.

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File URL: http://www.sciencedirect.com/science/article/B6VBW-4BWCCB6-1/2/e3138b791484f0637e2cb84d65a1497d
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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 51 (2004)
Issue (Month): 3 (April)
Pages: 635-652

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Handle: RePEc:eee:moneco:v:51:y:2004:i:3:p:635-652
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. Ilan Goldfajn & Poonam Gupta, 1999. "Does monetary policy stabilize the exchange rate following a currency crisis?," Textos para discussão 396, Department of Economics PUC-Rio (Brazil).
  2. Richard Clarida & Mark Gertler, 1996. "How the Bundesbank Conducts Monetary Policy," NBER Working Papers 5581, National Bureau of Economic Research, Inc.
  3. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 907-31, November.
  4. Evan Tanner, 1999. "Exchange Market Pressure and Monetary Policy; Asia and Latin America in the 1990's," IMF Working Papers 99/114, International Monetary Fund.
  5. Fabio C. Bagliano & Carlo A. Favero, . "Information from financial markets and VAR measures of monetary policy," Working Papers 135, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  6. David O. Cushman & Tao Zha, 1995. "Identifying monetary policy in a small open economy under flexible exchange rates," Working Paper 95-7, Federal Reserve Bank of Atlanta.
  7. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense? A Reply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 943-48, November.
  8. Jon Faust & John H. Rogers, 1999. "Monetary policy's role in exchange rate behavior," International Finance Discussion Papers 652, Board of Governors of the Federal Reserve System (U.S.).
  9. Kenneth N. Kuttner, 2000. "Monetary policy surprises and interest rates: evidence from the Fed funds futures markets," Staff Reports 99, Federal Reserve Bank of New York.
  10. Christopher A. Sims, 1992. "Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy," Cowles Foundation Discussion Papers 1011, Cowles Foundation for Research in Economics, Yale University.
  11. Daniel C. Hardy, 1998. "Anticipation and Surprises in Central Bank Interest Rate Policy: The Case of the Bundesbank," IMF Staff Papers, Palgrave Macmillan, vol. 45(4), pages 647-671, December.
  12. Vittorio Grilli & Nouriel Roubini, 1995. "Liquidity and Exchange Rates: Puzzling Evidence from the G-7 Countries," Working Papers 95-17, New York University, Leonard N. Stern School of Business, Department of Economics.
  13. Frederic S. Mishkin & Adam S. Posen, 1998. "Inflation Targeting: Lessons from Four Countries," NBER Working Papers 6126, National Bureau of Economic Research, Inc.
  14. Eichenbaum, Martin & Evans, Charles L, 1995. "Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 975-1009, November.
  15. Benedict S. C. Fung & Rohit Gupta, 1997. "Cash Setting, the Call Loan Rate, and the Liquidity Effect in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 30(4), pages 1057-82, November.
  16. Julie Huxford & Michael Reddell, 1996. "Implementing monetary policy in New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 59, December.
  17. Takatoshi Ito & Brenda González-Hermosillo, 1997. "The Bank of Canada's Monetary Policy Framework; Have Recent Changes Enhanced Central Bank Credibility?," IMF Working Papers 97/171, International Monetary Fund.
  18. Cook, Timothy & Hahn, Thomas, 1989. "The effect of changes in the federal funds rate target on market interest rates in the 1970s," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 331-351, November.
  19. Frank Campbell & Eleanor Lewis, 1998. "What Moves Yields in Australia?," RBA Research Discussion Papers rdp9808, Reserve Bank of Australia.
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