10th Anniversary Special IssueView this Special Issue
Tim Brailsford, Jack H. W. Penm, Chin Diew Lai, "Effectiveness of high interest rate policy on exchange rates: A reexamination of the Asian financial crisis", Advances in Decision Sciences, vol. 2006, Article ID 035752, 9 pages, 2006. https://doi.org/10.1155/JAMDS/2006/35752
Effectiveness of high interest rate policy on exchange rates: A reexamination of the Asian financial crisis
One of the most controversial issues in the aftermath of the Asian financial crisis has been the appropriate response of monetary policy to a sharp decline in the value of some currencies. In this paper, we empirically examine the effects on Asian exchange rates of sharply higher interest rates during the Asian financial crisis. Taking account of the currency contagion effect, our results indicate that sharply higher interest rates helped to support the exchange rates of South Korea, the Philippines, and Thailand. For Malaysia, no significant causal relation is found from the rate of interest to exchange rates, as the authorities in Malaysia did not actively adopt a high interest rate policy to defend the currency.
- T. Brailsford, J. H. W. Penm, and R. D. Terrell, “The adjustment of the Yule-Walker relations in VAR modelling: the impact of the Euro on the Hong Kong stock market,” Multinational Finance Journal, vol. 5, no. 1, pp. 35–58, 2001.
- G. Caporale, A. Cipollini, and P. Demetriades, “Monetary policy and the exchange rate during the Asian crisis: identification through heteroscedasticity,” working paper, Department of Economics, University of Leicester, Leicester, 2000.
- I. Choi and D. Park, “Causal relation between interest and exchange rates in the Asian currency crisis,” working paper, Kookmin University, Seoul, 2000.
- R. Dekle, C. Hsiao, and S. Wang, “High interest rates and exchange rate stabilization in Korea, Malaysia, and Thailand: an empirical investigation of the traditional and revisionist views,” Review of International Economics, vol. 10, no. 1, pp. 64–78, 2002.
- D. A. Dickey and W. A. Fuller, “Distribution of the estimators for autoregressive time series with a unit root,” Journal of the American Statistical Association, vol. 74, no. 366, part 1, pp. 427–431, 1979.
- M. Feldstein, “Refocusing the IMF,” Foreign Affairs, vol. 77, no. 2, pp. 20–33, 1998.
- J. Geweke, “Measurement of linear dependence and feedback between multiple time series,” Journal of the American Statistical Association, vol. 77, no. 378, pp. 304–324, 1982.
- I. Goldfajn and T. Baig, “Monetary policy in the aftermath of currency crises: the case of Asia,” working paper, International Monetary Fund, Washington, DC, 1998.
- D. Gould and S. Kamin, “The impact of monetary policy on exchange rate during financial crises,” working paper, Board of Governors of the Federal Reserve System, Washington, DC, 1999.
- C. Hsiao, “Autoregressive modelling of Canadian money and income data,” Journal of the American Statistical Association, vol. 74, no. 367, pp. 553–560, 1979.
- International Monetary Fund, “The role of monetary policy in responding to currency crises,” in World Economic Outlook, Washington, DC, 1998.
- G. Kaminsky and S. Schmukler, “The relationship between interest rates and exchange rates in six Asian countries,” working paper, The World Bank, Washington, DC, 1998.
- J. Nagayasu, “Currency crisis and contagion: evidence from exchange rates and sectoral stock indices of the Philippines and Thailand,” Journal of Asian Economics, vol. 12, no. 4, pp. 529–546, 2001.
- Y. C. Park, C.-S. Chung, and Y. Wang, “Exchange rate policies in Korea: has exchange rate volatility increased after the crisis?,” working paper, Korean Institute for Economic Policy, East Asian Bureau of Economic Research, 1999.
- J. H. W. Penm and R. D. Terrell, “Multivariate subset autoregressive modelling with zero constraints for detecting overall causality,” Journal of Econometrics, vol. 24, no. 3, pp. 311–330, 1984.
- J. H. Stock and M. W. Watson, “Testing for common trends,” Journal of the American Statistical Association, vol. 83, no. 404, pp. 1097–1107, 1988.
- A. Zellner, “An efficient method of estimating seemingly unrelated regressions and tests for aggregation bias,” Journal of the American Statistical Association, vol. 57, no. 298, pp. 348–368, 1962.
Copyright © 2006 Tim Brailsford et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.