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Do High Interest Rates Appreciate Exchange Rates during Crisis? The Korean Evidence

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  • Dekle, Robert
  • Hsiao, Cheng
  • Wang, Siyan

Abstract

This paper tries to answer the following basic question: have the high interest rates had the desired effect of appreciating the nominal exchange rates in the Asian crisis countries? We use Korean high-frequency (weekly) data during the crisis and its aftermath to examine the relationship between the increase in interest rates and the behaviour of exchange rates. We find that the lead-lag relation between the exchange rate and the interest rate clearly indicates that raising the interest rate has had the usual impact of appreciating the nominal exchange rate during the crisis period. Copyright 2001 by Blackwell Publishing Ltd

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Bibliographic Info

Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics & Statistics.

Volume (Year): 63 (2001)
Issue (Month): 3 (July)
Pages: 359-80

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Handle: RePEc:bla:obuest:v:63:y:2001:i:3:p:359-80

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  1. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 12(2-3), pages 231-254.
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  4. Peter C.B. Phillips, 1985. "Time Series Regression with a Unit Root," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 740R, Cowles Foundation for Research in Economics, Yale University, revised Feb 1986.
  5. Phillips, P.C.B., 1986. "Understanding spurious regressions in econometrics," Journal of Econometrics, Elsevier, Elsevier, vol. 33(3), pages 311-340, December.
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  7. Cheng Hsiao, 1997. "Cointegration and Dynamic Simultaneous Equations Model," Econometrica, Econometric Society, Econometric Society, vol. 65(3), pages 647-670, May.
  8. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  9. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, American Economic Association, vol. 73(3), pages 257-76, June.
  10. Phillips, Peter C. B., 1998. "Impulse response and forecast error variance asymptotics in nonstationary VARs," Journal of Econometrics, Elsevier, Elsevier, vol. 83(1-2), pages 21-56.
  11. Hsiao, Cheng, 1979. "Causality tests in econometrics," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 1(4), pages 321-346, November.
  12. Hsiao, Cheng & Fujiki, Hiroshi, 1998. "Nonstationary Time-Series Modeling versus Structural Equation Modeling: With an Application to Japanese Money Demand," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 16(1), pages 57-79, May.
  13. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, Elsevier, vol. 14(1-2), pages 3-24, February.
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Cited by:
  1. Hsing, Yu, 2009. "Analysis of the Behavior of the New Zealand Dollar Exchange Rate: Comparison of Four Major Models," Review of Applied Economics, Review of Applied Economics, Review of Applied Economics, vol. 5(1-2).
  2. Inci Gumus, 2002. "Effects of the Interest Rate Defense on Exchange Rates During the 1994 Crisis in Turkey," Working Papers 0214, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  3. Kim, Jung-Kwan & Ratti, Ronald A., 2006. "Economic activity, foreign exchange rate, and the interest rate during the Asian crisis," Journal of Policy Modeling, Elsevier, Elsevier, vol. 28(4), pages 387-402, May.
  4. repec:ebl:ecbull:v:5:y:2007:i:6:p:1-14 is not listed on IDEAS
  5. João Paulo Martin Faleiros & Denisard Cnéio De Oliveira Alves, 2011. "Taxade Juros Alta Evita Ataques Especulativos Sobre O Câmbio? Umareavaliação Empírica Para 6 Países Durante O Período Entre 1975 E 2008," Anais do XXXVIII Encontro Nacional de Economia [Proceedings of the 38th Brazilian Economics Meeting], ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of 212, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  6. Luis-Felipe Zanna, 2006. "Fighting against currency depreciation, macroeconomic instability and sudden stops," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 848, Board of Governors of the Federal Reserve System (U.S.).
  7. Caporale, Guglielmo Maria & Cipollini, Andrea & Demetriades, Panicos O., 2005. "Monetary policy and the exchange rate during the Asian crisis: identification through heteroscedasticity," Journal of International Money and Finance, Elsevier, Elsevier, vol. 24(1), pages 39-53, February.
  8. Yu Hsing, 2006. "Analysis of Short-term Exchange Rate Movements in Korea: Application of an Extended Mundell-Fleming Model," Global Economic Review, Taylor & Francis Journals, Taylor & Francis Journals, vol. 35(2), pages 145-151.
  9. Vincent Bouvatier, 2007. "Are International Interest Rate Differentials Driven by the Risk Premium? The Case of Asian Countries," Economics Bulletin, AccessEcon, vol. 5(6), pages 1-14.
  10. Erdoğan, Seyfettin & Karacan, Rıdvan & Alpaslan, Barış, 2013. "Interest Rates, Exchange Rates and Macroeconomic Performance," MPRA Paper 50838, University Library of Munich, Germany.

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