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What Drives Monetary Policy in Post-Crisis East Asia? Interest Rate or Exchange Rate Monetary Policy Rules

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  • Cavoli, Tony

Abstract

This paper estimates a simple small open macroeconomic model to analyse the effectiveness of monetary policy rules (MPRs) where either the nominal interest rate or the nominal exchange rate is the policy instrument. The aim is to ascertain which of those MPRs are best suited for a selection of inflation targeting economies of Asia. Normally, one would associate inflation targeting with interest rate rules but it is thought that, due to fear of floating, exchange rate rules may well be more effective given the openness of these economies. It is found that interest rate rules seem to better reflect the prevailing policy regime than exchange rate rules. It is also found that stronger relationships pertaining to the interest rate rules are found in the case of Korea and Thailand than for Indonesia and the Philippines. Exchange rates appear to be very influential in determining the value of the nominal interest rate but not in a policy sense.

Suggested Citation

  • Cavoli, Tony, 2010. "What Drives Monetary Policy in Post-Crisis East Asia? Interest Rate or Exchange Rate Monetary Policy Rules," Journal of Asian Economics, Elsevier, vol. 21(5), pages 456-465, October.
    • Handle: RePEc:eee:asieco:v:21:y:2010:i:5:p:456-465
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    References listed on IDEAS

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    Cited by:

    1. Tuan Khai Vu, 2015. "Exchange Rate Regimes and the Sources of Real Exchange Rate Fluctuations: Evidence from East Asia," Discussion Papers 31, Meisei University, School of Economics.
    2. Hamilton-Hart, Natasha, 2011. "Distribution, Domestic Politics and Monetary Cooperation in East Asia," ADBI Working Papers 332, Asian Development Bank Institute.
    3. Taguchi, Hiroyuki, 2018. "Monetary policy rule under inflation targeting: the case of Mongolia," MPRA Paper 86132, University Library of Munich, Germany.
    4. Vu, Tuan Khai & Nakata, Hayato, 2018. "Oil price fluctuations and the small open economies of Southeast Asia: An analysis using vector autoregression with block exogeneity," Journal of Asian Economics, Elsevier, vol. 54(C), pages 1-21.

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