Currency Regime and Monetary Autonomy

Hiroyuki Taguchi (tagusaya0710@s3.wh.qit.ne.jp)

Finance Working Papers from East Asian Bureau of Economic Research

Abstract: This paper analyzes the exchange rate regimes from the perspective of monetary independence through examining the sensitivity of the domestic interest rate to the international interest rate under different regimes. To be specific, by using recent and global data, we first examine co-integration relationship between domestic and international interest rates to capture the long-run transmission, and then estimate adjustment speeds in the transmission process of interest rates by using an error-correction model. Our estimation results basically support the traditional views of the impossible trinity. The floating regime shows the less sensitivity of the domestic interest rate to the international interest rate than the fixed regimes, with the lack of co-integration relationship or the slower adjustment speed. The result implies some capacity for domestic monetary autonomy under the floating regime. The hard peg regime, however, does not represent the fastest adjustment speed, which might reflect the existence of the restrictions on capital flows in its sample cases.

Keywords: exchange rate arrangement; monetary autonomy; co-integration; error correction analysis (search for similar items in EconPapers)
JEL-codes: C23 E52 F31 F33 (search for similar items in EconPapers)
Date: 2009-01
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Citations: View citations in EconPapers (6)

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