Monetary policy announcements and stock price dynamics in a small open economy

Using a monetary framework with stock markets, this paper investigates dynamic behaviors of a small open economy with various adjustments in the manufacturing prices. For an instantaneous adjustment of the manufacturing prices, stock values and exchange rates may appear to misjump or misadjust at the instant of the monetary policy announcement. When the manufacturing prices adjust sluggishly, exchange rates may overshoot but stock values can exhibit various dynamic patterns, including overshooting or undershooting.