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The Empirical Relationship Between Exchange Rates and Interest Rates in Post-Crisis Asia

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  • Hwee Kwan CHOW & Yoonbai KIM

Abstract

In post-crisis Asia, all crisis-hit countries (except Malaysia) announced a shift from exchange rate based monetary policy framework to the explicit adoption of inflation targeting that uses interest rates as the key monetary policy operating instrument. In this study, we examine the empirical relationship between exchange rates and interest rates, and investigate how the dynamics between them have changed following the crisis. This is carried out by constructing a bivariate VAR-GARCH model for each of the four Asian crisis countries, namely Indonesia, Korea, Philippines and Thailand. The findings suggest these countries do not use interest rate policy more actively to stabilize exchange rates after the crisis, and provide evidence that their domestic currencies exhibit greater sensitivity to competitors’ exchange rates post-crisis. Further, the results indicate that increased exchange rate flexibility has not led to greater stability in interest rates in these economies

Suggested Citation

  • Hwee Kwan CHOW & Yoonbai KIM, 2004. "The Empirical Relationship Between Exchange Rates and Interest Rates in Post-Crisis Asia," Econometric Society 2004 Far Eastern Meetings 575, Econometric Society.
  • Handle: RePEc:ecm:feam04:575
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    More about this item

    Keywords

    exchange rate; interest rate; bivariate VAR-GARCH; causation in volatilities;

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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