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Traditional view or revisionist view? The effects of monetary policy on exchange rates in Asia

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  • Peng Huang
  • C. James Hueng
  • Ruey Yau

Abstract

This article investigates the channels through which the short-term interest rate is used as an instrument to stabilize the exchange rates in Asia during the financial crisis in the 1990s. A time-varying-parameter model with Generalized Autoregressive Conditional Heteroscedasticity (GARCH) disturbances is employed to estimate the dynamic effect of the interest rate on the exchange rate. We distinguish the direct effect from the indirect effect. The direct effect exists so that a contractionary monetary policy can have an appreciation impact (the traditional view). The indirect effect refers to the higher default risk induced by a monetary policy tightening, which on the contrary generates a depreciation pressure (the revisionist view). Using weekly data from Indonesia, South Korea and Thailand from 1997:07 to 1998:12, we find that there is no significant evidence in favour of the traditional view. The revisionist view is clearly in effect in Thailand at the very beginning of the crisis.

Suggested Citation

  • Peng Huang & C. James Hueng & Ruey Yau, 2010. "Traditional view or revisionist view? The effects of monetary policy on exchange rates in Asia," Applied Financial Economics, Taylor & Francis Journals, vol. 20(9), pages 753-760.
  • Handle: RePEc:taf:apfiec:v:20:y:2010:i:9:p:753-760
    DOI: 10.1080/09603100903539484
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    References listed on IDEAS

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    1. David M. Gould & Steven B. Kamin, 1999. "The impact of monetary policy on exchange rates during financial crises," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
    2. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
    3. Vittorio Grilli & Nouriel Roubini, 1995. "Liquidity and Exchange Rates: Puzzling Evidence from the G-7 Countries," Working Papers 95-17, New York University, Leonard N. Stern School of Business, Department of Economics.
    4. Jason Furman & Joseph E. Stiglitz, 1998. "Economic Crises: Evidence and Insights from East Asia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 1-136.
    5. Steven Radelet & Jeffrey D. Sachs, 1998. "The East Asian Financial Crisis: Diagnosis, Remedies, Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 1-90.
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    Cited by:

    1. Hsing Yu, 2015. "Short-Run Determinants of the IDR/USD Exchange Rate: A Simultaneous-Equation Model," Global Economy Journal, De Gruyter, vol. 15(3), pages 311-318, September.
    2. Yu Hsing, 2015. "Short-Run Determinants of the USD/MYR Exchange Rate," Economics Bulletin, AccessEcon, vol. 35(1), pages 97-105.
    3. Hsing, Yu, 2016. "Comparison of the Fundamental and Monetary Models of the Determinants of the Argentine Peso/US Dollar Exchange Rate," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 69(4), pages 379-388.
    4. Yu HSING, 2016. "Determinants of the Hungarian forint/ US dollar exchange rate," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(1(606), S), pages 163-170, Spring.
    5. Yu HSING, 2015. "Short-run determinants of the USD/PLN exchange rate and policy implications," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(2(603), S), pages 247-254, Summer.
    6. Yu Hsing, 2015. "Determinants of the AUD/USD Exchange Rate and Policy Implications," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 5(2), pages 326-332, February.

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