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Monetary Policy and the Exchange Rate During the Asian Crisis Identification Through Heteroscedasticity

Author

Listed:
  • Guglielmo Maria Caporale
  • Andrea Cipollini
  • Panicos Demetriades

Abstract

This paper examines whether a monetary policy tightening (i.e., an increase in the domestic interest rate) was successful in defending the exchange rate from speculative pressures during the Asian financial crisis. We estimate a bivariate VECM for four Asian countries, and improve upon existing studies in two important ways. First, by using a long data span we are able to compare the effects of an interest rate rise on the nominal exchange rate during tranquil and turbulent periods. Second, we take into account the endogeneity of interest rates and identify the system by exploiting the heteroscedasticity properties of the relevant time series, as suggested by Sentana and Fiorentini (2001). We find that while tight monetary policy helped to defend the exchange rate during tranquil periods, it had the opposite effect during the Asian crisis.

Suggested Citation

  • Guglielmo Maria Caporale & Andrea Cipollini & Panicos Demetriades, 2000. "Monetary Policy and the Exchange Rate During the Asian Crisis Identification Through Heteroscedasticity," Discussion Papers in Economics 00/11, Division of Economics, School of Business, University of Leicester, revised Feb 2002.
    • Handle: RePEc:lec:leecon:00/11
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    More about this item

    Keywords

    Monetary Policy; Financial Crisis; Identification;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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