Which Monetary Shocks Matter in Small Open Economies? Evidence from SVARs
53 Pages Posted: 20 Jan 2017
Date Written: January 19, 2017
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
JEL Classification: E44, E52
Suggested Citation: Suggested Citation