The study looks at how changes in monetary policy affect the real exchange rate in a small open economy. When countries switch from fixed to floating exchange rates, the real exchange rate becomes much more variable. This is surprising because prices are assumed to be flexible. The researchers found that a model combining fixed exchange rate policies with some price rigidities can explain this increase in variability. The real exchange rate is 3 to 6 times more volatile under floating rates compared to fixed rates, regardless of the shocks. The impact on other macroeconomic variables depends on the monetary policy rule and the source of fluctuations. The model also addresses issues like the exchange rate anomaly and the transmission of international monetary policy shocks.