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Interest rate autonomy in the presence of exchange rate stability: evidence from 13 selected Asia Pacific countries

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  • Pei-Tha Gan

Abstract

A notable feature of the empirical research on the interest rate autonomy is that very few studies seek to determine whether the use of interest rate policy to fine-tune the exchange rate misalignments has been undermined by sterilised foreign exchange intervention. To overcome this deficiency, this study uses the open-economy Taylor rule as a policy reaction function in a standard macroeconomic model to specify the measures of independent interest rate policy reacts to the exchange rate and examines the empirical validity based on a sample of 13 selected Asia Pacific countries. Using the generalised method of moments, the findings provide some policy implications; the interest rate instrument can serve as a coordinating function to fine-tune the exchange rate misalignments for improving the macroeconomic stability and serve as an external shock absorber to avoid or mitigate impact of instability in the foreign capital market.

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  • Pei-Tha Gan, 2018. "Interest rate autonomy in the presence of exchange rate stability: evidence from 13 selected Asia Pacific countries," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 23(3), pages 393-410, July.
    • Handle: RePEc:taf:rjapxx:v:23:y:2018:i:3:p:393-410
    DOI: 10.1080/13547860.2017.1408570
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    Cited by:

    1. Waheed, Farah & Abdul Rashid,, 2021. "Credit frictions, fiscal imbalances, monetary policy autonomy, and monetary policy rules," The Journal of Economic Asymmetries, Elsevier, vol. 23(C).

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