Openness and the Effects of Monetary Policy on the Exchange Rates: An Empirical Analysis

Nihat Islk () and Mustafa Acar
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Nihat Islk: Selçuk University, Turkey, Postal: Kýrýkkale Üniversitesi, ÝÝBF, Ýktisat Bölümü, Kýrýkkale, Turkey, Tel: 90-533-, 632 4766, Fax: 90-312-230 8003
Mustafa Acar: Kýrýkkale University, Turkey

Journal of Economic Integration, 2005, vol. 20, 52-67

Abstract:

This paper examines whether the effects of monetary policy on the exchange rates depend on the degree of openness of an economy. Theoretically, it can be shown that the effect of openness on the ability of money to influence the exchange rate is ambiguous. In light of this, the purpose of this study is to investigate how the relationship between monetary policy and exchange rate is affected by openness, hence shedding some light on the theoretical ambiguity. Using annual data for a panel of 41 countries for the period 1988-2000, the paper’s empirical results indicate that the effects of monetary policy on the exchange rates are negatively affected by economy’s openness. It seems that the more open the economy, the smaller is the depreciation effects of a given increase in the money growth rate. More interestingly, contrary to conventional expectations, monetary expansions in developed countries do not seem to result in depreciation of the domestic currency.

Keywords: Openness; monetary policy; exchange rate (search for similar items in EconPapers)
JEL-codes: E52 F41 (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:integr:0305

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