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

See all articles by Pei-Tha Gan

Pei-Tha Gan

Universiti Pendidikan Sultan Idris (Sultan Idris Education University)

Date Written: December 4, 2017

Abstract

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

Gan, Pei-Tha, Interest Rate Autonomy in the Presence of Exchange Rate Stability: Evidence from 13 Selected Asia Pacific Countries (December 4, 2017). Journal of the Asia Pacific Economy, DOI: 10.1080/13547860.2017.1408570. Available at SSRN: https://ssrn.com/abstract=3102964

Pei-Tha Gan (Contact Author)

Universiti Pendidikan Sultan Idris (Sultan Idris Education University) ( email )

Department of Economics
Faculty of Management and Economics
Tanjong Malim, Perak 35900
Malaysia
+ 60177709689 (Phone)
+ 60 15 48117295 (Fax)

HOME PAGE: http://myupsi.upsi.edu.my/cms/DirektoriPakar/viewDetail.jsp?SID=K00899

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