Effects of Monetary Policy Coordination on Small Open Economies

Abstract

This paper proposes an innovative approach for analyzing the influence of external shocks on small open economies. This approach incorporates the role of large-country monetary policy coordination in influencing shocks and provides an empirical tool to analyze them. In the face of recent fluctuations in commodity prices, this new tool makes it possible to evaluate the influence on small countries of large-country policy coordination in response to these shocks. Based on an analysis of data from Mexico, such policies are found to provide better results for Mexico when Mexico's trade partners coordinated their responses.

Keywords:

• external shocks
• monetary policy coordination
• small open economies