The Impact Of Monetary Policy On Financial Markets In Small Open Economies: More Or Less Effective During The Global Financial Crisis?

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Executive Summary

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, New 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.

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