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Examining the volatility of exchange rate: Does monetary policy matter?

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  • Lim, Shu Yi
  • Sek, Siok Kun

Abstract

We conduct empirical analysis on examining the changes in exchange rate volatility under two monetary policy regimes, i.e. the pre- and post- inflation targeting (IT) regimes. In addition, we also investigate if the monetary decisions can have impacts on the volatility of exchange rate. The study is focused in four Asian countries that experienced drastic in the switch of monetary policy from the rigid exchange rate to flexible exchange rate and inflation targeting after the Asian financial crisis of 1997. The exponential generalized autoregressive conditional heteroskedasticity model is applied and our results show that exchange rate is more persistent and volatile in the pre-IT period as compared to post-IT period. The exchange rate persistency is higher in the long-run but the persistency is low in the short run. We fail to find evidence to show that the adoption of flexible exchange rate and inflation targeting lead to greater volatility in exchange rate. The monetary decisions can have impacts on the volatility of exchange rate but the impacts vary across countries.

Suggested Citation

  • Lim, Shu Yi & Sek, Siok Kun, 2014. "Examining the volatility of exchange rate: Does monetary policy matter?," MPRA Paper 60526, University Library of Munich, Germany, revised Oct 2014.
  • Handle: RePEc:pra:mprapa:60526
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    References listed on IDEAS

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    3. Anders Aslund, 2010. "The Last Shall Be the First: The East European Financial Crisis," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 5218, July.
    4. Flood, Robert P & Rose, Andrew K, 1999. "Understanding Exchange Rate Volatility without the Contrivance of Macroeconomics," Economic Journal, Royal Economic Society, vol. 109(459), pages 660-672, November.
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    More about this item

    Keywords

    exchange rate volatility; monetary policy; shock persistency;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions

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