The Impact of Monetary Policyon the Exchange Rate: Evidence From Three Small Open Economies

Author: Mr. Jeromin Zettelmeyer

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.

Volume/Issue: Volume 2000 Issue 141

Publication date: August 2000

ISBN: 9781451856170

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Topics covered in this book

This title contains information about the following subjects. Click on a subject if you would like to see other titles with the same subjects.

Business and Economics , Banks and Banking , Investments and Securities-General , Money and Monetary Policy , WP , market turbulence , policy announcement , bank bill , interest rate hike , money market , Monetary Policy , Interest Rates , Exchange Rates , short interest , policy action , interest rate target , overnight rate , exchange rate market turbulence , tight money , exchange rate development , exchange rate weakness , Exchange rate policy , Central bank policy rate , Currencies , Depreciation , Australia and New Zealand

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Summary

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.