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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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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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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
Handle: RePEc:ris:adbrei:0072
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