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Examining the exchange rate regime–monetary policy autonomy nexus: Evidence from Malaysia

Soo Khoon Goh and Robert McNown

International Review of Economics & Finance, 2015, vol. 35, issue C, 292-303

Abstract: Some studies suggest that Asian countries can be exempted from the impossible trinity. We examined the empirical relevance of this argument by reviewing the experience of Malaysia. We defined monetary autonomy by analyzing the interaction between the Malaysian and US interest rates. We used the Unrestricted Error Correction Model Pesaran Bounds test to analyze the interaction between the Malaysian and US interest rates during three different sub periods. Our empirical results showed that there is no cointegration evidence during the managed floating exchange rate periods. However, we found that there was a level relationship between the Malaysian and US interest rates during the period when Malaysia had a fixed exchange rate and an open capital account regime. In contrast with other existing studies, we conclude that Malaysia is not exempted from the impossible trinity. Our study has also highlighted that the Pesaran Bounds test must be interpreted carefully when applied to series with mixed orders of integration.

Keywords: Interest rate interaction; Monetary autonomy; Malaysia (search for similar items in EconPapers)
JEL-codes: F41 E52 E58 C22 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:35:y:2015:i:c:p:292-303

DOI: 10.1016/j.iref.2014.10.006

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