Traditional View or Revisionist View? The Effects of Monetary Policy on Exchange Rates in Asia

Document Type

Article

Publication Date

5-1-2010

Department

School of Business

Abstract

This article investigates the channels through which the short-term interest rate is used as an instrument to stabilize the exchange rates in Asia during the financial crisis in the 1990s. A time-varying-parameter model with Generalized Autoregressive Conditional Heteroscedasticity (GARCH) disturbances is employed to estimate the dynamic effect of the interest rate on the exchange rate. We distinguish the direct effect from the indirect effect. The direct effect exists so that a contractionary monetary policy can have an appreciation impact (the traditional view). The indirect effect refers to the higher default risk induced by a monetary policy tightening, which on the contrary generates a depreciation pressure (the revisionist view). Using weekly data from Indonesia, South Korea and Thailand from 1997:07 to 1998:12, we find that there is no significant evidence in favour of the traditional view. The revisionist view is clearly in effect in Thailand at the very beginning of the crisis. © 2010 Taylor & Francis.

DOI

10.1080/09603100903539484

First Page

753

Last Page

760

Volume

20

Issue

9

ISSN

09603107

Comments

At the time of publication, Peng Huang was affiliated with Ripon College.

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