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Exchange Rate Regime And Monetary Policy Independence In East Asia

  • ChangJin Kim
  • Jong-Wha Lee

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. Copyright 2008 The Authors. Journal compilation 2008 Blackwell Publishing Ltd

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Article provided by Wiley Blackwell in its journal Pacific Economic Review.

Volume (Year): 13 (2008)
Issue (Month): 2 (05)
Pages: 155-170

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Handle: RePEc:bla:pacecr:v:13:y:2008:i:2:p:155-170
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