Abstract
By using a block-exogenous vector autoregressive model and the data of a small open economy under a currency board, this paper gains several advantages in examining the empirical relevance of open economy macroeconomic theories regarding international monetary policy transmission. The results support that the interest rate channel is more significant than the trade balance channel. In response to a U.S. contractionary monetary shock, the interest rate of the small economy overshoots in the short run and deflates the economy so excessively that domestic currency depreciates and net exports revive, and that, in turn, eases the negative impact on domestic output.
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