Interest Rate Autonomy in the Presence of Exchange Rate Stability: Evidence from 13 Selected Asia Pacific Countries
Journal of the Asia Pacific Economy, DOI: 10.1080/13547860.2017.1408570
Posted: 19 Jan 2018
Date Written: December 4, 2017
A notable feature of the empirical research on the interest rate autonomy is that very few studies seek to determine whether the use of interest rate policy to fine-tune the exchange rate misalignments has been undermined by sterilised foreign exchange intervention. To overcome this deficiency, this study uses the open economy Taylor rule as a policy reaction function in a standard macroeconomic model to specify the measures of independent interest rate policy reacts to the exchange rate and examines the empirical validity based on a sample of 13 selected Asia Pacific countries. Using the generalised method of moments, the findings provide some policy implications; the interest rate instrument can serve as a coordinating function to fine-tune the exchange rate misalignments for improving the macroeconomic stability and serve as an external shock absorber to avoid or mitigate impact of instability in the foreign capital market.
Keywords: Exchange Rate, Foreign Exchange Intervention, Interest Rate Policy, Monetary Policy
JEL Classification: E52, E58, F31
Suggested Citation: Suggested Citation