Interest rate autonomy in the presence of exchange rate stability: evidence from 13 selected Asia Pacific countries

Pei-Tha Gan ()

Journal of the Asia Pacific Economy, 2018, vol. 23, issue 3, 393-410

Abstract: A notable feature of the empirical research on the interest rate autonomy is that very few studies seek to determine whether the use of interest rate policy to fine-tune the exchange rate misalignments has been undermined by sterilised foreign exchange intervention. To overcome this deficiency, this study uses the open-economy Taylor rule as a policy reaction function in a standard macroeconomic model to specify the measures of independent interest rate policy reacts to the exchange rate and examines the empirical validity based on a sample of 13 selected Asia Pacific countries. Using the generalised method of moments, the findings provide some policy implications; the interest rate instrument can serve as a coordinating function to fine-tune the exchange rate misalignments for improving the macroeconomic stability and serve as an external shock absorber to avoid or mitigate impact of instability in the foreign capital market.

Date: 2018
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DOI: 10.1080/13547860.2017.1408570

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