The Impact of Monetary Policy on Financial Markets in Small Open Economies: More or Less Effective During the Global Financial Crisis

Publication | January 2011

This paper uses an event study approach to estimate the effect of monetary policy shocks on stock markets (the first stage of the wealth channel) and exchange rates (which affect net exports) for eight small open economies.

This paper estimates the impact of monetary policy on exchange rates and stock markets for eight small open economies: Australia, Canada, the Republic of Korea, Ne w Zealand, the United Kingdom, Indonesia, Malaysia and Thailand. On average across these countries, a one percentage point surprise rise in official interest rates leads to a 1% appreciation of the exchange rate and a 1% fall in stock market indices. The effect on exchange rates is notably weaker in the non-Organization for Economic Cooperation and Development (OECD) countries with a managed float. For the OECD countries, there is no robust evidence of a change in the effect of policy during the global financial crisis. For the non-OECD countries, there is some evidence of a stronger effect of policy on stock markets during the crisis, although further research is needed to investigate whether this is a result of measurement issues.

Additional Details

Authors
Type
Series
Subjects
  • Finance sector development
  • Regional cooperation and integration
Countries
  • Indonesia
  • Korea, Republic of
  • Malaysia
  • Thailand

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