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The Empirical Relationship Between Exchange Rates and Interest Rates in Post-Crisis Asia

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  • Hwee Kwan Chow

    ()
    (School of Economics and Social Sciences, Singapore Management University)

  • Yoonbai Kim

    ()
    (University of Kentucky and National University of Singapore)

Abstract

In post-crisis Asia, all crisis-hit countries (except Malaysia) announced a shift from exchange rate based monetary policy framework to the explicit adoption of inflation targeting that uses interest rates as the key monetary policy operating instrument. In this study, we examine the empirical relationship between exchange rates and interest rates, and investigate how the dynamics between them have changed following the crisis. This is carried out by constructing a bivariate VAR-GARCH model for each of the four Asian crisis countries, namely Indonesia, Korea, Philippines and Thailand. The findings suggest these countries do not use interest rate policy more actively to stabilize exchange rates after the crisis, and provide evidence that their domestic currencies exhibit greater sensitivity to competitors’ exchange rates post-crisis. Further, the results indicate that increased exchange rate flexibility has not led to greater stability in interest rates in these economies.

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Bibliographic Info

Paper provided by Singapore Management University, School of Economics in its series Working Papers with number 11-2004.

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Length: 20 pages
Date of creation: Mar 2004
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Publication status: Published in SMU Economics and Statistics Working Paper Series
Handle: RePEc:siu:wpaper:11-2004

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Keywords: Exchange rate; interest rate; bivariate VAR-GARCH model; causation in volatilities;

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