Exchange rate intervention in small open economies: The role of risk premium and commodity price shocks

► We estimate how monetary policy works in small open economies. ► We build a DSGE model that incorporates the basic features of these economies. ► In the short run, a positive risk premium shock expands GDP. ► Central banks can avoid this excess volatility by raising the interest rate. ► However, this result depends crucially on the mix of shocks hitting the economy.