New method untangles monetary policy impact on global economies.
The article explores how to measure the impact of monetary policy in open economies. It builds on previous work by Bernanke and Mihov to analyze how interest rates and exchange rates affect each other. The researchers developed a method to distinguish between two types of monetary policy shocks: one from open market operations and another from foreign exchange interventions. When this method was applied to data from a small, open economy, it produced results without the anomalies seen in previous studies.