The impact of monetary policy on the exchange rate: evidence from three small open economies$

This paper studies the impact effect of monetary policy shocks on the exchange rate in Australia, Canada, and New Zealand duringthe 1990s. Shocks are identified by the reaction of three month market interest rates to policy announcements that were not themselves endogenous to economic news on the same day. The main result is that a 100 basis point contractionary shock will appreciate the exchange rate by 2–3 percent on impact. The association of interest rate hikes with depreciations that is sometimes observed duringperiods of exchange market pressure is mainly attributable to reverse causality. r 2004 Elsevier B.V. All rights reserved.