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Exchange Rate Regime And Monetary Policy Independence In East Asia

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  • Chang Jin Kim
  • Jong‐Wha Lee

Abstract

. This paper investigates whether the choice of exchange rate regimes influences the sensitivity of domestic interest rates to international interest rates. We empirically analyse this issue in the context of East Asian economies by employing a regime switching model. We find that the sensitivity of local interest rates to international interest rates declined in Korea and Thailand after they adopted floating exchange rate regimes. We also find that Japan, with a floating exchange regime, has greater independence in monetary policy than a pegged economy such as Hong Kong. These empirical findings suggest that exchange rate flexibility provides greater monetary independence.

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  • Chang Jin Kim & Jong‐Wha Lee, 2008. "Exchange Rate Regime And Monetary Policy Independence In East Asia," Pacific Economic Review, Wiley Blackwell, vol. 13(2), pages 155-170, May.
    • Handle: RePEc:bla:pacecr:v:13:y:2008:i:2:p:155-170
    DOI: 10.1111/j.1468-0106.2008.00394.x
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    2. Hiroyuki Taguchi, 2009. "Currency Regime and Monetary Autonomy," Finance Working Papers 23076, East Asian Bureau of Economic Research.
    3. Amit Ghosh & Ramya Ghosh, 2012. "Capital controls, exchange rate regime and monetary policy independence in India," International Journal of Economic Policy in Emerging Economies, Inderscience Enterprises Ltd, vol. 5(3), pages 212-230.
    4. Naoyuki Yoshino & Sahoko Kaji & Tamon Asonuma, 2016. "Dynamic Effects of Changes in the Exchange Rate System," Asian Development Review, MIT Press, vol. 33(1), pages 111-161, March.
    5. Reade, J. James & Volz, Ulrich, 2011. "Leader of the pack? German monetary dominance in Europe prior to EMU," Economic Modelling, Elsevier, vol. 28(1), pages 239-250.
    6. Joshua Aizenman & Rajeswari Sengupta, 2013. "Financial Trilemma in China and a Comparative Analysis with India," Pacific Economic Review, Wiley Blackwell, vol. 18(2), pages 123-146, May.
    7. Goh, Soo Khoon & McNown, Robert, 2015. "Examining the exchange rate regime–monetary policy autonomy nexus: Evidence from Malaysia," International Review of Economics & Finance, Elsevier, vol. 35(C), pages 292-303.
    8. Taguchi, Hiroyuki, 2011. "Monetary autonomy in emerging market economies: The role of foreign reserves," Emerging Markets Review, Elsevier, vol. 12(4), pages 371-388.
    9. Taguchi, Hiroyuki & Nataraj, Geethanjali & Sahoo, Pravakar, 2011. "Monetary autonomy in selected Asian economies: The role of international reserves," Journal of Asian Economics, Elsevier, vol. 22(6), pages 471-482.
    10. Simeon Nanovsky & Yoonbai Kim, 2018. "International Capital Movement and Monetary Independence in Asia," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 24(2), pages 179-198, May.
    11. Sofoklis Vogiazas & Constantinos Alexiou & Orafiri C. Ogan, 2019. "Drivers of the real effective exchange rates in high and upper‐middle income countries," Australian Economic Papers, Wiley Blackwell, vol. 58(1), pages 41-53, March.
    12. Naoyuki Yoshino & Sahoko Kaji & Tamon Asonuma, 2011. "Dynamic Effect of Change in Exchange Rate System -From the Fixed Exchange Rate Regime to the Basket-peg or Floating Regime," Keio/Kyoto Joint Global COE Discussion Paper Series 2011-026, Keio/Kyoto Joint Global COE Program.
    13. Yoshino, Naoyuki & Kaji, Sahoko & Asonuma, Tamon, 2016. "Exchange rate regime switching in Malaysia and Singapore in response to China’s move to a basket peg: A DSGE analysis," Journal of Asian Economics, Elsevier, vol. 46(C), pages 17-37.

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