Publication Type
Working Paper
Version
publishedVersion
Publication Date
3-2004
Abstract
In post-crisis Asia, all crisis-hit countries (except Malaysia) announced a shift from exchange rate based monetary policy framework to the explicit adoption of inflation targeting that uses interest rates as the key monetary policy operating instrument. In this study, we examine the empirical relationship between exchange rates and interest rates, and investigate how the dynamics between them have changed following the crisis. This is carried out by constructing a bivariate VAR-GARCH model for each of the four Asian crisis countries, namely Indonesia, Korea, Philippines and Thailand. The findings suggest these countries do not use interest rate policy more actively to stabilize exchange rates after the crisis, and provide evidence that their domestic currencies exhibit greater sensitivity to competitors’ exchange rates post-crisis. Further, the results indicate that increased exchange rate flexibility has not led to greater stability in interest rates in these economies.
Keywords
Exchange rate, interest rate, bivariate VAR-GARCH model, causation in volatilities
Discipline
Asian Studies | Finance | International Economics
Research Areas
Macroeconomics
First Page
1
Last Page
19
Publisher
SMU Economics and Statistics Working Paper Series, No. 11-2004
City or Country
Singapore
Citation
Chow, Hwee Kwan and KIM, Yoonbai.
The Empirical Relationship between Exchange Rates and Interest Rates in Post-Crisis Asia. (2004). 1-19.
Available at: https://ink.library.smu.edu.sg/soe_research/785
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.