Does Greater Exchange Rate Flexibility Affect Interest Rates in Post-Crisis Asia?

Publication Type

Journal Article

Publication Date

6-2006

Abstract

In post-crisis Asia, all crisis-hit countries (except Malaysia) announced a shift from an exchange rate based monetary policy framework to the adoption of inflation targeting which uses interest rates as the monetary policy operating instrument. In this study, we examine the empirical relationship between exchange rates and interest rates by applying a bivariate VAR-GARCH model to the Asian crisis countries, namely Indonesia, Korea, Philippines and Thailand. The findings suggest that, following the crisis, their currencies exhibit greater sensitivity to competitors' exchange rates, and that increased exchange rate flexibility stabilizes interest rates only in the short run.

Keywords

Exchange rate, Interest rate, Bivariate VAR-GARCH model, Causation in volatilities

Discipline

Asian Studies | Finance | Macroeconomics

Research Areas

Macroeconomics

Publication

Journal of Asian Economics

Volume

17

Issue

3

First Page

478

Last Page

493

ISSN

1049-0078

Identifier

10.1016/j.asieco.2006.04.005

Publisher

Elsevier

Additional URL

https://doi.org/10.1016/j.asieco.2006.04.005

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