The article explores how a central bank should respond to financial shocks in a small open economy. When credit spreads increase due to financial shocks, it makes monetary policy less effective. The study used a model that considers different types of households and financial institutions. Financial shocks lead to more bad loans, causing lenders to charge higher interest rates. The central bank should lower interest rates when credit spreads rise, but the effect is not as strong as in a closed economy facing the same situation.