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Which Monetary Shocks Matter in Small Open Economies? Evidence from SVARs

Jongrim Ha () and Inhwan So ()
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Jongrim Ha: Development Economics Prospects Group (DECPG), World Bank
Inhwan So: Economics Research Institute, The Bank of Korea

No 2017-2, Working Papers from Economic Research Institute, Bank of Korea

Abstract: This paper investigates the nature of monetary policy transmission in the U.S. and selected small open economies by estimating SVAR models using the external instrument identification method. Differing from related studies on the U.S., which employ high-frequency futures data on Federal Funds rates, we exploit alternative sets of external instruments for the focal economies. We find that U.S. monetary policy plays an important role in monetary transmission in SOE interest rates, presumably hampering the effectiveness of domestic monetary policy. We also provide some evidence that foreign exchange rates in this process respond to monetary shocks as Dornbusch (1976)'s overshooting hypothesis.

Keywords: Monetary policy transmission; External instrument identification; Structural VAR model (search for similar items in EconPapers)
JEL-codes: E44 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2017-01-19
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