We develop a structural cointegrated vector autoregressive (VAR) model with weakly exogenous foreign variables, known as an augmented VECM or VECX*, suitable for a small open economy like South Africa. This model is novel for South Africa in two ways: it is the first VECX* developed to analyse monetary policy and the first model that uses time‐varying trade weights to create the foreign series. We impose three significant long‐run relations (augmented purchasing power parity, uncovered interest parity and Fisher parity) to investigate the effect of a monetary policy shock on inflation. The results suggest the effective transmission of monetary policy.