This paper uses a four-variable vector autoregression model to explore how monetary authorities responded to shocks in Korea and Taiwan over the period 1981.1-1994.12. The analysis reveals that sterilization is an important element of the response to shocks to foreign assets in both economies. In particular, monetary authorities do not appear to be prepared to accept fluctuations in the exchange rate and the money supply that may result from changes in foreign assets, but more readily accept fluctuations in these variables that result from domestic credit shocks. There are also differences in the responses of Korea and Taiwan that suggest that the former may be more insulated from external shocks.
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Article provided by Federal Reserve Bank of San Francisco in its journal Economic Review.
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