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

Hwee Kwan Chow and Yoonbai Kim ()

No 11-2004, Working Papers from Singapore Management University, School of Economics

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.

Keywords: Exchange rate; interest rate; bivariate VAR-GARCH model; causation in volatilities (search for similar items in EconPapers)
JEL-codes: F33 F41 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2004-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published in SMU Economics and Statistics Working Paper Series

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