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

Guglielmo Maria Caporale, Andrea Cipollini and Panicos Demetriades

No 00/11, Discussion Papers in Economics from Division of Economics, School of Business, University of Leicester

Abstract: 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, as suggested by Sentana and Fiorentini (2001). 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.

Keywords: Monetary Policy; Financial Crisis; Identification (search for similar items in EconPapers)
JEL-codes: C32 E52 (search for similar items in EconPapers)
Date: 2000-12, Revised 2002-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Journal Article: Monetary policy and the exchange rate during the Asian crisis: identification through heteroscedasticity (2005)
Working Paper: Monetary Policy and the Exchange Rate During the Asian Crisis: Identification Through Heteroscedasticity (2003)
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