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

Jeromin Zettelmeyer

No 2000/141, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: 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 (search for similar items in EconPapers)
Pages: 45
Date: 2000-08-01
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Citations: View citations in EconPapers (12)

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