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What Drives Monetary Policy in Post-Crisis East Asia? Interest Rate or Exchange Rate Monetary Policy Rules

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  • Cavoli, Tony
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    Abstract

    This paper estimates a simple small open macroeconomic model to analyse the effectiveness of monetary policy rules (MPRs) where either the nominal interest rate or the nominal exchange rate is the policy instrument. The aim is to ascertain which of those MPRs are best suited for a selection of inflation targeting economies of Asia. Normally, one would associate inflation targeting with interest rate rules but it is thought that, due to fear of floating, exchange rate rules may well be more effective given the openness of these economies. It is found that interest rate rules seem to better reflect the prevailing policy regime than exchange rate rules. It is also found that stronger relationships pertaining to the interest rate rules are found in the case of Korea and Thailand than for Indonesia and the Philippines. Exchange rates appear to be very influential in determining the value of the nominal interest rate but not in a policy sense.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Asian Economics.

    Volume (Year): 21 (2010)
    Issue (Month): 5 (October)
    Pages: 456-465

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    Handle: RePEc:eee:asieco:v:21:y:2010:i:5:p:456-465

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    Web page: http://www.elsevier.com/locate/asieco

    Related research

    Keywords: Asia Exchange rate regime Inflation targeting Monetary policy rules;

    References

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    1. Barry Eichengreen, 2002. "Can Emerging Markets Float? Should They Inflation Target?," Working Papers Series 36, Central Bank of Brazil, Research Department.
    2. Tony Cavoli & Ramkishen S. Rajan, 2006. "Inflation Targeting Arrangements In Asia : Exploring The Role Of The Exchange Rate," Macroeconomics Working Papers 22564, East Asian Bureau of Economic Research.
    3. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
    4. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, December.
    5. Lars E. O. Svensson, 2000. "Open-Economy Inflation Targeting," NBER Working Papers 6545, National Bureau of Economic Research, Inc.
    6. Laurence M. Ball, 1999. "Policy Rules for Open Economies," NBER Chapters, in: Monetary Policy Rules, pages 127-156 National Bureau of Economic Research, Inc.
    7. Clarida, Richard & GalĂ­, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers 1750, C.E.P.R. Discussion Papers.
    8. Eric Parrado, 2004. "Singapore's Unique Monetary Policy," IMF Working Papers 04/10, International Monetary Fund.
    9. Cavoli, Tony, 2008. "The exchange rate and optimal monetary policy rules in open and developing economies: Some simple analytics," Economic Modelling, Elsevier, vol. 25(5), pages 1011-1021, September.
    10. M. S. Mohanty & Marc Klau, 2004. "Monetary policy rules in emerging market economies: issues and evidence," BIS Working Papers 149, Bank for International Settlements.
    11. Tony Cavoli & Ramkishen S. Rajan, 2007. "Managing in the Middle: Characterizing Singapore's Exchange Rate Policy ," Asian Economic Journal, East Asian Economic Association, vol. 21(3), pages 321-342, 09.
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