Monetary Policy and the Exchange Rate: The Role of Openness

Georgios Karras

International Economic Journal, 1999, vol. 13, issue 2, 75-88

Abstract: This paper examines whether the effects of monetary police on the exchange rate depend on the openness of the economy. Theoretically, openness can be shown to have an ambiguous effect on the ability of money to influence the exchange rate, so the issue has to be resolved empirically. Using annual data from the 1953-1990 period for a panel of 37 countries, the empirical results indicate that the effects of monetary policy on the exchange rate are negatively affected by the economy' s openness. Therefore, the more open the economy, the smaller the (short-run) depreciation effects of a given increase in the money growth rate (in the long run, relative PPP applies). This finding is robust to a number to different specifications. [E52, F41]

Date: 1999
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DOI: 10.1080/10168739900000038

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