Does Monetary Policy Matter for East Asian Countries? An Empirical Study About Policy Efficiency and Macroeconomic Performance in Pre-Crisis and Post-Crisis Eras

Abstract

This paper is an application of the newly-developed technique to assess the efficiency of monetary policy in five East Asian Countries. It measures the contribution of improved monetary policy to the changes in macroeconomic performance in terms of inflation and output variability before and after the 1997 Asian financial crisis. The paper also tries to reveal the changes in the central bank's inflation variability aversion over time by estimating actual and optimal policy rules for each country in two sample periods. The study suggests that for most of the 5 countries of interest, central bankers turn to be more inflation variability averse after the crisis than they were before. Monetary policy plays an important role in 3 countries contributing over 50% to the overall macroeconomic performance improvement after the crisis. For the other two, monetary policy is less important in a sense that most of the change in macroeconomic performance is due to the dramatic change in the volatility of aggregate shocks after the crisis.

Keywords: Monetary policy, Asian financial crisis, output and inflation variability

JEL Classification: E52, E58, E65