Openness and the Effects of Monetary Policy on the Exchange Rates: An Empirical Analysis |
Nihat Isik, Mustafa Acar, H. Bayram Isik |
Selçuk University, Turkey Kýrýkkale University, Turkey Atatürk University, Turkey |
Copyright ©2005 Journal of Economic Integration |
ABSTRACT |
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This paper examines whether the effects of monetary policy on the exchange rates depend on the degree of openness of an economy. Theoretically, it can be shown that the effect of openness on the ability of money to influence the exchange rate is ambiguous. In light of this, the purpose of this study is to investigate how the relationship between monetary policy and exchange rate is affected by openness, hence shedding some light on the theoretical ambiguity. Using annual data for a panel of 41 countries for the period 1988-2000, the paper's empirical results indicate that the effects of monetary policy on the exchange rates are negatively affected by economy's openness. It seems that the more open the economy, the smaller is the depreciation effects of a given increase in the money growth rate. More interestingly, contrary to conventional expectations, monetary expansions in developed countries do not seem to result in depreciation of the domestic currency. JEL classification codes: E52, F41 |
Keywords:
Openness | monetary policy | exchange rate
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REFERENCE |
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Karras, Georgios (1999), "Monetary Policy and the Exchange Rate: The Role of Openness", International Economic Journal, 13(2): 75-88. |
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Kamin, S.B. and J.H. Rogers (2000) "Output and Real Exchange Rate in Developing Countries: An Application to Mexico," Journal of Developing Economics, 62: 85-109. |
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Taylor, John B. (1993), Macroeconomic Policy in a World Economy, New York: Norton. |
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