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Examining the Threshold Effect of Exchange Rate Changes on Monetary Policy Reaction Function of ASEAN-5: A Panel Threshold Approach

Author

Listed:
  • Lavaneesvari Manogaran*

    (School of Mathematical Sciences, Universiti Sains Malaysia (Lavaneesvari Manogaran), Malaysia)

  • Siok Kun Sek

    (School of Mathematical Sciences, Universiti Sains Malaysia (Siok Kun Sek), Malaysia)

Abstract

In small open economies, the connection between exchange rate and monetary policy function is well-recognised either in the form of theoretical concept or empirical literature. Unlike others, this paper revisits the study by utilising the panel threshold approach of Hansen (1999) to investigate how the monetary policy function of ASEAN-5 responding to exchange rate changes in two different policy regimes, pre-crisis (1980Q1-1996Q4) and post-crisis (1999Q1-2015Q4). The results exhibit asymmetric effect of exchange rate changes on monetary policy function in both sub-periods. The double threshold effect in the pre-crisis, showing exchange rate changes influencing the policy function in a limited threshold value. Conversely, in the post-crisis, the single threshold effect illustrating exchange rate changes having stronger effect on the policy function in various magnitudes at all threshold values. Although claiming the execution of flexible exchange rate system aftermath crisis, there exist policymakers’ intervention in stabilising the exchange rate changes with respect to ‘fear of floating’ behaviour in ASEAN-5. Lastly, in each sub-period, the threshold effect of exchange rate changes relative to inflation variation is highly significant while trivial to output gap in triggering the policy function. This witnessing, by and large, the ultimate goal of ASEAN-5 is to achieve price stability.

Suggested Citation

  • Lavaneesvari Manogaran* & Siok Kun Sek, 2018. "Examining the Threshold Effect of Exchange Rate Changes on Monetary Policy Reaction Function of ASEAN-5: A Panel Threshold Approach," The Journal of Social Sciences Research, Academic Research Publishing Group, pages 243-248:2.
  • Handle: RePEc:arp:tjssrr:2018:p:243-248
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    References listed on IDEAS

    as
    1. Inoue, Takeshi & Hamori, Shigeyuki, 2009. "An Empirical Analysis of the Monetary Policy Reaction Function in India," IDE Discussion Papers 200, Institute of Developing Economies, Japan External Trade Organization(JETRO).
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