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Currency Regime and Monetary Autonomy

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  • Hiroyuki Taguchi

    (Policy Research Institute)

Abstract

This paper analyzes the exchange rate regimes from the perspective of monetary independence through examining the sensitivity of the domestic interest rate to the international interest rate under different regimes. To be specific, by using recent and global data, we first examine co-integration relationship between domestic and international interest rates to capture the long-run transmission, and then estimate adjustment speeds in the transmission process of interest rates by using an error-correction model. Our estimation results basically support the traditional views of the impossible trinity. The floating regime shows the less sensitivity of the domestic interest rate to the international interest rate than the fixed regimes, with the lack of co-integration relationship or the slower adjustment speed. The result implies some capacity for domestic monetary autonomy under the floating regime. The hard peg regime, however, does not represent the fastest adjustment speed, which might reflect the existence of the restrictions on capital flows in its sample cases.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number 23076.

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Date of creation: Jan 2009
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Handle: RePEc:eab:financ:23076

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Related research

Keywords: exchange rate arrangement; monetary autonomy; co-integration; error correction analysis;

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References

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  1. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  2. Kaddour Hadri, 2000. "Testing for stationarity in heterogeneous panel data," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 148-161.
  3. Kawai, Masahiro, 2002. "Exchange Rate Arrangements in East Asia: Lessons from the 1997-98 Currency Crisis," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(S1), pages 167-204, December.
  4. Reinhart, Carmen & Calvo, Guillermo, 2001. "Fixing for your life," MPRA Paper 13873, University Library of Munich, Germany.
  5. Kim, Soyoung & Yang, Doo Yong, 2009. "International Monetary Transmission and Exchange Rate Regimes: Floaters vs. Non-Floaters," ADBI Working Papers 181, Asian Development Bank Institute.
  6. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
  7. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
  8. Jaroslava Hlouskova & Martin Wagner, 2005. "The Performance of Panel Unit Root and Stationarity Tests: Results from a Large Scale Simulation Study," Economics Working Papers ECO2005/05, European University Institute.
  9. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
  10. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
  11. Ogawa, Eiji & Ito, Takatoshi, 2002. "On the Desirability of a Regional Basket Currency Arrangement," Journal of the Japanese and International Economies, Elsevier, vol. 16(3), pages 317-334, September.
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Citations

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Cited by:
  1. Hiroyuki Taguchi & Chizuru Kato, 2011. "Assessing the performance of inflation targeting in East Asian economies," Asian-Pacific Economic Literature, Asia Pacific School of Economics and Government, The Australian National University, vol. 25(1), pages 93-102, 05.
  2. Hiroyuki Taguchi & Woong-Ki Sohn, 2010. "Inflation Targeting and Pass-through Rate in East Asian Economies," Macroeconomics Working Papers 23115, East Asian Bureau of Economic Research.
  3. Yu Hsing, 2012. "Exchange Rate Arrangements and Monetary Autonomy in Fourteen Selected Asian and Pacific Countries," Economics Bulletin, AccessEcon, vol. 32(2), pages 1731-1736.

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