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

28 Pages Posted: 23 Jun 2003

See all articles by Guglielmo Maria Caporale

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Andrea Cipollini

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics; University of Palermo - d/SEAS; Università degli studi di Modena e Reggio Emilia (UNIMORE) - Center for Research in Banking and Finance (CEFIN)

Panicos Demetriades

University of Leicester - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 2003

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, following Rigobon (2002). 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.

Keywords: Monetary Policy, Financial Crisis, Identification

Keywords: Monetary Policy, Financial Crisis, Identification

JEL Classification: E52, C32

Suggested Citation

Caporale, Guglielmo Maria and Cipollini, Andrea and Cipollini, Andrea and Demetriades, Panicos O., Monetary Policy and the Exchange Rate During the Asian Crisis: Identification Through Heteroscedasticity (July 2003). Available at SSRN: https://ssrn.com/abstract=419161 or http://dx.doi.org/10.2139/ssrn.419161

Guglielmo Maria Caporale (Contact Author)

Brunel University London - Department of Economics and Finance ( email )

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HOME PAGE: http://www.brunel.ac.uk/about/acad/bbs/bbsstaff/ef_staff/guglielmocaporale/

London South Bank University ( email )

Centre for Monetary and Financial Economics
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CESifo (Center for Economic Studies and Ifo Institute)

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Germany

German Institute for Economic Research (DIW Berlin) ( email )

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Germany

Andrea Cipollini

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics ( email )

Viale Berengario 51
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Italy

University of Palermo - d/SEAS ( email )

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Palermo, 90124
Italy

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Center for Research in Banking and Finance (CEFIN) ( email )

via Berengario 51
Modena, modena I-41100
Italy

Panicos O. Demetriades

University of Leicester - Department of Economics ( email )

Department of Economics
Leicester LE1 7RH, Leicestershire LE1 7RH
United Kingdom
+ 44 116 252 2835 (Phone)
+ 44 116 252 2908 (Fax)

HOME PAGE: http://www.le.ac.uk/economics/staff/pd28.html

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