EXCHANGE RATE REGIME AND MONETARY POLICY INDEPENDENCE IN EAST ASIA

Chang‐Jin Kim · Jong‐Wha Lee

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Monetary Policy and Economic Impact Banking stability, regulation, efficiency Global Financial Crisis and Policies

Abstract

Abstract. This paper investigates whether the choice of exchange rate regimes influences the sensitivity of domestic interest rates to international interest rates. We empirically analyse this issue in the context of East Asian economies by employing a regime switching model. We find that the sensitivity of local interest rates to international interest rates declined in Korea and Thailand after they adopted floating exchange rate regimes. We also find that Japan, with a floating exchange regime, has greater independence in monetary policy than a pegged economy such as Hong Kong. These empirical findings suggest that exchange rate flexibility provides greater monetary independence.

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References

1989A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle 1993Tests for Parameter Instability and Structural Change With Unknown Change Point 2000Fear of Floating 2004The Modern History of Exchange Rate Arrangements: A Reinterpretation 2002Fear of Floating 2004Classifying exchange rate regimes: Deeds vs. words 2004The Effect of Fixed Exchange Rates on Monetary Policy 2003An Essay on the Revived Bretton Woods System

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