IDEAS home Printed from https://ideas.repec.org/a/eee/asieco/v21y2010i5p456-465.html
   My bibliography  Save this article

What Drives Monetary Policy in Post-Crisis East Asia? Interest Rate or Exchange Rate Monetary Policy Rules

Author

Listed:
  • Cavoli, Tony

Abstract

This paper estimates a simple small open macroeconomic model to analyse the effectiveness of monetary policy rules (MPRs) where either the nominal interest rate or the nominal exchange rate is the policy instrument. The aim is to ascertain which of those MPRs are best suited for a selection of inflation targeting economies of Asia. Normally, one would associate inflation targeting with interest rate rules but it is thought that, due to fear of floating, exchange rate rules may well be more effective given the openness of these economies. It is found that interest rate rules seem to better reflect the prevailing policy regime than exchange rate rules. It is also found that stronger relationships pertaining to the interest rate rules are found in the case of Korea and Thailand than for Indonesia and the Philippines. Exchange rates appear to be very influential in determining the value of the nominal interest rate but not in a policy sense.

Suggested Citation

  • Cavoli, Tony, 2010. "What Drives Monetary Policy in Post-Crisis East Asia? Interest Rate or Exchange Rate Monetary Policy Rules," Journal of Asian Economics, Elsevier, vol. 21(5), pages 456-465, October.
    • Handle: RePEc:eee:asieco:v:21:y:2010:i:5:p:456-465
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1049-0078(10)00029-1
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Laurence M. Ball, 1999. "Policy Rules for Open Economies," NBER Chapters, in: Monetary Policy Rules, pages 127-156, National Bureau of Economic Research, Inc.
    2. Guy Debelle, 2001. "The Case for Inflation Targeting in East Asian Countries," RBA Annual Conference Volume (Discontinued), in: David Gruen & John Simon (ed.),Future Directions for Monetary Policies in East Asia, Reserve Bank of Australia.
    3. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, April.
    4. Tony Cavoli & Ramkishen S. Rajan, 2007. "Managing in the Middle: Characterizing Singapore's Exchange Rate Policy," Asian Economic Journal, East Asian Economic Association, vol. 21(3), pages 321-342, September.
    5. Cavoli, Tony, 2008. "The exchange rate and optimal monetary policy rules in open and developing economies: Some simple analytics," Economic Modelling, Elsevier, vol. 25(5), pages 1011-1021, September.
    6. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    7. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, April.
    8. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
    9. M. S. Mohanty & Marc Klau, 2005. "Monetary Policy Rules in Emerging Market Economies: Issues and Evidence," Springer Books, in: Rolf J. Langhammer & Lúcio Vinhas Souza (ed.), Monetary Policy and Macroeconomic Stabilization in Latin America, pages 205-245, Springer.
    10. Barry Eichengreen, 2006. "Can Emerging Markets Float? Should They Inflation Target?," Chapters, in: Matías Vernengo (ed.), Monetary Integration and Dollarization, chapter 8, Edward Elgar Publishing.
    11. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
    12. Tony Cavoli & Ramkishen S. Rajan, 2006. "Inflation Targeting Arrangements In Asia : Exploring The Role Of The Exchange Rate," Macroeconomics Working Papers 22564, East Asian Bureau of Economic Research.
    13. Mr. Eric Parrado, 2004. "Singapore's Unique Monetary Policy: How Does it Work?," IMF Working Papers 2004/010, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Tuan Khai Vu, 2015. "Exchange Rate Regimes and the Sources of Real Exchange Rate Fluctuations: Evidence from East Asia," Discussion Papers 31, Meisei University, School of Economics.
    2. Hamilton-Hart, Natasha, 2011. "Distribution, Domestic Politics and Monetary Cooperation in East Asia," ADBI Working Papers 332, Asian Development Bank Institute.
    3. Taguchi, Hiroyuki, 2018. "Monetary policy rule under inflation targeting: the case of Mongolia," MPRA Paper 86132, University Library of Munich, Germany.
    4. Luangaram, Pongsak & Wongpunya, Nipit, 2024. "The effect of trade openness and exchange rate on inflation targeting in Thailand," Journal of Asian Economics, Elsevier, vol. 92(C).
    5. Vu, Tuan Khai & Nakata, Hayato, 2018. "Oil price fluctuations and the small open economies of Southeast Asia: An analysis using vector autoregression with block exogeneity," Journal of Asian Economics, Elsevier, vol. 54(C), pages 1-21.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:udc:esteco:v:44:y:2017:i:2:p:97-124 is not listed on IDEAS
    2. Carlos García & Jorge Restrepo & Scott Roger, 2009. "Hybrid Inflation Targeting Regimes," Working Papers Central Bank of Chile 533, Central Bank of Chile.
    3. Cavoli, Tony, 2008. "The exchange rate and optimal monetary policy rules in open and developing economies: Some simple analytics," Economic Modelling, Elsevier, vol. 25(5), pages 1011-1021, September.
    4. Wollmershauser, Timo, 2006. "Should central banks react to exchange rate movements? An analysis of the robustness of simple policy rules under exchange rate uncertainty," Journal of Macroeconomics, Elsevier, vol. 28(3), pages 493-519, September.
    5. Caporale, Guglielmo Maria & Helmi, Mohamad Husam & Çatık, Abdurrahman Nazif & Menla Ali, Faek & Akdeniz, Coşkun, 2018. "Monetary policy rules in emerging countries: Is there an augmented nonlinear taylor rule?," Economic Modelling, Elsevier, vol. 72(C), pages 306-319.
    6. corrinne ho & robert n mccauley, 2004. "Living with flexible exchange rates:," International Finance 0411003, University Library of Munich, Germany.
    7. Deming Luo & Stephen Ferris, 2008. "Optimal Simple Monetary Policy Rules in a Small Open Economy with Exchange Rate Imperfections," Carleton Economic Papers 08-03, Carleton University, Department of Economics.
    8. Bhavesh Salunkhe & Anuradha Patnaik, 2018. "The IS Curve and Monetary Policy Transmission in India: A New Keynesian Perspective," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 12(1), pages 41-66, February.
    9. Käfer Benjamin, 2014. "The Taylor Rule and Financial Stability – A Literature Review with Application for the Eurozone," Review of Economics, De Gruyter, vol. 65(2), pages 159-192, August.
    10. Benigno, Pierpaolo & Benigno, Gianluca, 2001. "Monetary Policy Rules and the Exchange Rate," CEPR Discussion Papers 2807, C.E.P.R. Discussion Papers.
    11. Berg, Andrew & Borensztein, Eduardo & Mauro, Paolo, 2002. "An evaluation of monetary regime options for Latin America," The North American Journal of Economics and Finance, Elsevier, vol. 13(3), pages 213-235, December.
    12. Giancarlo Corsetti & Paolo Pesenti, 2009. "The Simple Geometry of Transmission and Stabilization in Closed and Open Economies," NBER Chapters, in: NBER International Seminar on Macroeconomics 2007, pages 65-116, National Bureau of Economic Research, Inc.
    13. Frömmel, Michael & Schobert, Franziska, 2006. "Monetary Policy Rules in Central and Eastern Europe," Hannover Economic Papers (HEP) dp-341, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    14. Frömmel, Michael & Garabedian, Garo & Schobert, Franziska, 2011. "Monetary policy rules in Central and Eastern European Countries: Does the exchange rate matter?," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 807-818.
    15. Jesus M. Garcia-Iglesias & Rebeca Muñoz Torres & George Saridakis, 2013. "Did the Bank of Mexico follow a systematic behaviour in its transition to an inflation targeting regime?," Applied Financial Economics, Taylor & Francis Journals, vol. 23(14), pages 1205-1213, July.
    16. Thomas Willett, 2003. "Fear of Floating Needn't Imply Fixed Rates: An OCA Approach to the Operation of Stable Intermediate Currency Regimes," Open Economies Review, Springer, vol. 14(1), pages 71-91, January.
    17. Thorvardur Tjörvi Ólafsson, 2006. "The New Keynesian Phillips Curve: In Search of Improvements and Adaptation to the Open Economy," Economics wp31_tjorvi, Department of Economics, Central bank of Iceland.
    18. Anders Bergvall, 2005. "Exchange rate regimes and macroeconomic stability: the case of Sweden," Oxford Economic Papers, Oxford University Press, vol. 57(3), pages 422-446, July.
    19. Jannsen, Nils & Klein, Melanie, 2011. "The international transmission of euro area monetary policy shocks," Kiel Working Papers 1718, Kiel Institute for the World Economy (IfW Kiel).
    20. Richard H. Clarida & Daniel Waldman, 2008. "Is Bad News about Inflation Good News for the Exchange Rate? And, If So, Can That Tell Us Anything about the Conduct of Monetary Policy?," NBER Chapters, in: Asset Prices and Monetary Policy, pages 371-396, National Bureau of Economic Research, Inc.
    21. Shinji Takagi & Vitalie Ciubotaru, 2013. "Putting the Pieces Together: The Moldovan Exchange Rate Policy Puzzle," Research in Economics and Business: Central and Eastern Europe, Tallinn School of Economics and Business Administration, Tallinn University of Technology, vol. 5(1).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:asieco:v:21:y:2010:i:5:p:456-465. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/asieco .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.