Does Greater Exchange Rate Flexibility Affect Interest Rates in Post-Crisis Asia?
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.
Exchange rate, Interest rate, Bivariate VAR-GARCH model, Causation in volatilities
Asian Studies | Finance | Macroeconomics
Journal of Asian Economics
Chow, Hwee Kwan and KIM, Yoonbai.
Does Greater Exchange Rate Flexibility Affect Interest Rates in Post-Crisis Asia?. (2006). Journal of Asian Economics. 17, (3), 478-493. Research Collection School Of Economics.
Available at: http://ink.library.smu.edu.sg/soe_research/445