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Monetary Policy Responses to the Exchange Rate: Empirical Evidence from Three East Asian Inflation-Targeting Countries

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  • Naoto Osawa

    (Bank of Japan)

Abstract

Using monetary policy reaction functions, this paper examines whether monetary policy responds to the exchange rate in three East Asian inflation-targeting countries, namely, Korea, Thailand and the Philippines. Contrary to the results in existing studies, it finds no evidence that monetary policy in these countries responds to the exchange rate. While extant work employs sample periods including the Asian financial crisis between 1997 and 1998, this paper focuses on the inflation-targeting regimes adopted in the period following the crisis. The strong monetary policy response to the exchange rate to defend against currency depreciation during the crisis is found to contribute to the difference in results.

Suggested Citation

  • Naoto Osawa, 2006. "Monetary Policy Responses to the Exchange Rate: Empirical Evidence from Three East Asian Inflation-Targeting Countries," Bank of Japan Working Paper Series 06-E-14, Bank of Japan.
    • Handle: RePEc:boj:bojwps:06-e-14
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    References listed on IDEAS

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    Cited by:

    1. Demir, İshak, 2014. "Monetary policy responses to the exchange rate: Empirical evidence from the ECB," Economic Modelling, Elsevier, vol. 39(C), pages 63-70.
    2. Sek, Siok Kun & Kapsalyamova, Zhanna, 2008. "Exchange rate pass-through and volatility: Impacts on domestic prices in four Asian countries," MPRA Paper 11130, University Library of Munich, Germany, revised 26 Oct 2008.
    3. Lebogang Mateane & Christian R. Proaño, 2020. "Does monetary policy react asymmetrically to exchange rate misalignments? Evidence for South Africa," Empirical Economics, Springer, vol. 58(4), pages 1639-1658, April.
    4. Hoda Selim, 2012. "Exploring the Role of the Exchange Rate in Monetary Policy in Egypt," Working Papers 733, Economic Research Forum, revised 2012.
    5. Muhammad Naveed Tahir, 2011. "Inflation Targeting, Exchange Rate and Financial Globalization," Working Papers 1130, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    6. Haryo Kuncoro, 2020. "Interest Rate Policy and Exchange Rates Volatility Lessons from Indonesia," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(2), pages 19-42.
    7. Siok Kun, Sek, 2009. "The impacts of economic structures on the performance of simple policy rules in a small open economy," MPRA Paper 25065, University Library of Munich, Germany.
    8. Sek, Siok Kun, 2008. "Interactions between monetary policy and exchange rate in inflation targeting emerging countries: the case of three East Asian countries," MPRA Paper 12034, University Library of Munich, Germany, revised 09 Dec 2008.
    9. Muhammad Naveed Tahir, 2011. "Inflation Targeting, Exchange Rate and Financial Globalization," Working Papers halshs-00646601, HAL.

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