Abstract
ABSTRACT This paper shows that under a floating exchange rate and integrated financial markets an optimizing central bank concerned about price and output stability partly accommodates a change in monetary policy abroad. A positive co-movement between the domestic policy rate and the foreign interest rate does not indicate lack of monetary policy independence but is an outcome of optimal policymaking in an open economy deeply embedded in the global financial architecture. Empirical evidence on overnight interest rate changes in Oceania (New Zealand, Australia) and US federal funds rate changes is consistent with this view.
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