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Monetary Policy and the Exchange Rate During the Asian Crisis: Identification Through Heteroscedasticity

  • Guglielmo Maria Caporale

    ()

    (London South Bank University)

  • Andrea Cipollini

    ()

    (Queen Mary, University of London - Department of Economics)

  • Panicos Demetriades

    ()

    (University of Leicester - Department of Economics)

This paper examines whether a monetary policy tightening (i.e., an increase in the domestic interest rate) was successful in defending the exchange rate from speculative pressures during the Asian financial crisis. We estimate a bivariate VECM for four Asian countries, and improve upon existing studies in two important ways. First, by using a long data span we are able to compare the effects of an interest rate rise on the nominal exchange rate during tranquil and turbulent periods. Second, we take into account the endogeneity of interest rates and identify the system by exploiting the heteroscedasticity properties of the relevant time series, following Rigobon (2002). We find that while tight monetary policy helped to defend the exchange rate during tranquil periods, it had the opposite effect during the Asian crisis.

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Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 23.

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Length: 28
Date of creation: 23 Jun 2003
Date of revision:
Handle: RePEc:rtv:ceisrp:23
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  17. Michel Normandin & Louis Phaneuf, 1996. "The Liquidity Effect: Testing Identification Conditions Under Time-Varying Conditional Volatility," Cahiers de recherche CREFE / CREFE Working Papers 40, CREFE, Université du Québec à Montréal.
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