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Exchange Rate Asymmetry and Flexible Exchange Rates under Inflation Targeting Regimes: Evidence from Four East and Southeast Asian Countries

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  • Victor Pontines
  • Reza Y. Siregar

Abstract

The paper demonstrates that the economies of Indonesia, Korea, Philippines and Thailand, which are among the first group of emerging markets to embrace the inflation targeting framework of monetary policy, tend to adopt a form of an asymmetrical exchange rate behaviour wherein appreciation pressures are restrained more substantially than depreciation pressures. In short, these four Asian economies exemplify aversion to appreciations such that greater flexibility is allowed only one side of the market. Formal econometric tests using the smooth transition autoregressive and the Markov regime switching models confirm this hypothesis of aversion to appreciation and show that the central banks of these four economies tend to tolerate more of depreciations than of appreciations of their local currencies against the US dollar.

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This book is provided by South East Asian Central Banks (SEACEN) Research and Training Centre in its series Staff Papers with number sp77 and published in 2010.

Handle: RePEc:sea:spaper:sp77

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  1. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
  2. Reza Yamora Siregar & Vincent Choon Seng Lim, 2010. "The Role of Central Banks in Sustaining Economic Recovery and in Achieving Financial Stability," Journal of Advanced Studies in Finance, ASERS Publishing, vol. 0(1), pages 83-99, June.
  3. Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers, Stockholm University, Institute for International Economic Studies 638, Stockholm University, Institute for International Economic Studies.
  4. Almekinders, G.J. & Eijffinger, S.C.W., 1996. "A friction model of daily Bundesbank and Federal Reserve intervention," Open Access publications from Tilburg University urn:nbn:nl:ui:12-73527, Tilburg University.
  5. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  6. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
  7. Hyginus Leon & Serineh Najarian, 2005. "Asymmetric adjustment and nonlinear dynamics in real exchange rates," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 10(1), pages 15-39.
  8. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 15(2), pages 3-24, Spring.
  9. Naveen Srinivasan & Vidya Mahambare & M. Ramachandran, 2009. "Preference asymmetry and international reserve accretion in India," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 16(15), pages 1543-1546.
  10. van Dijk, Dick & Teräsvirta, Timo & Franses, Philip Hans, 2000. "Smooth Transition Autoregressive Models - A Survey of Recent Developments," Working Paper Series in Economics and Finance 380, Stockholm School of Economics, revised 17 Jan 2001.
  11. Miguel A. Savastano & Paul R. Masson & Sunil Sharma, 1997. "The Scope for Inflation Targeting in Developing Countries," IMF Working Papers 97/130, International Monetary Fund.
  12. Nicoletta Batini & Andrew G Haldane, 1999. "Forward-looking rules for monetary policy," Bank of England working papers 91, Bank of England.
  13. Graciela Laura Kaminsky, 1997. "Leading Indicators of Currency Crises," IMF Working Papers 97/79, International Monetary Fund.
  14. Ramachandran, M. & Srinivasan, Naveen, 2007. "Asymmetric exchange rate intervention and international reserve accumulation in India," Economics Letters, Elsevier, Elsevier, vol. 94(2), pages 259-265, February.
  15. Eichengreen, Barry & Rose, Andrew & Wyplosz, Charles, 1996. " Contagious Currency Crises: First Tests," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 98(4), pages 463-84, December.
  16. Pontines, Victor & Rajan, Ramkishen S., 2011. "Foreign exchange market intervention and reserve accumulation in emerging Asia: Is there evidence of fear of appreciation?," Economics Letters, Elsevier, Elsevier, vol. 111(3), pages 252-255, June.
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Cited by:
  1. Gan-Ochir Doojav & Borkhuu Gotovsuren & Tsenddorj Dorjpurev, 2012. "Financial Contagion and Volatile Capital Flows," Occasional Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number occ56, June.
  2. Vincent C.S. Lim & Victor Pontines, 2012. "Global Imbalances: A Primer," Staff Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, South East Asian Central Banks (SEACEN) Research and Training Centre, number sp86, June.
  3. Pomfret, Richard & Pontines, Victor, 2013. "Exchange Rate Policy and Regional Trade Agreements: A Case of Conflicted Interests?," ADBI Working Papers, Asian Development Bank Institute 436, Asian Development Bank Institute.

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