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|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|7450||2006||16 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Asian Economics, Volume 17, Issue 3, June 2006, Pages 478–493
In post-crisis Asia, all crisis-hit countries (except Malaysia) announced a shift from an exchange rate based monetary policy framework to the adoption of inflation targeting which uses interest rates as the monetary policy operating instrument. In this study, we examine the empirical relationship between exchange rates and interest rates by applying a bivariate VAR–GARCH model to the Asian crisis countries, namely Indonesia, Korea, Philippines and Thailand. The findings suggest that, following the crisis, their currencies exhibit greater sensitivity to competitors’ exchange rates, and that increased exchange rate flexibility stabilizes interest rates only in the short run.
In the aftermath of the 1997 Asian financial crisis, all the crisis-hit countries with the notable exception of Malaysia announced a shift from an exchange rate based monetary policy framework to the explicit adoption of inflation targeting. Notwithstanding continued official interventions in the foreign exchange markets, these countries, namely, Indonesia, (South) Korea, the Philippines and Thailand announced their move towards using interest rates as the key monetary policy-operating instrument. After all, the pegging of regional currencies to the U.S. dollar – de facto or otherwise – has been blamed by some for contributing to the crisis. In the words of Frankel (2003): “The fact that the (U.S.) dollar had occupied a larger role in East Asian monetary arrangements than the U.S. played in their economies made an eventual mismatch inevitable.” The experiences of the Asian crisis economies pose several interesting questions. In particular, are the exchange rates of these countries now more responsive to international pressures than before? Does greater exchange rate flexibility help reduce interest rate volatility? To examine these issues, we explore the empirical relationship between the exchange rates and interest rates of the four Asian crisis countries mentioned above. Malaysia chose to impose capital controls in September 1998 and installed a fixed exchange rate. These measures have apparently succeeded in stabilizing not only the exchange rate but also the interest rate. Hence, we excluded Malaysia from the analysis.1 There are two opposing views on the impact of exchange rate flexibility on interest rate variability. The first is that there is a negative relationship between the volatilities of the exchange rate and the interest rate, which this paper terms the volatility tradeoff hypothesis. It is conventionally argued that greater exchange rate variability is stabilizing in the sense that it releases the pressures on the economy and promotes stability in such macroeconomic aggregates as interest rates, money supply and output. Indeed, one of the traditional advantages of floating exchange rates is that interest rates are more stable as the monetary authority is freed from the burden of maintaining a fixed exchange rate (Reinhart & Reinhart, 2001). Conversely, fixing the exchange rate induces intersectoral or intertemporal shifts in volatilities to other variables (Frenkel & Mussa, 1980; Frankel & Rose, 1995; Rose, 1995). In this view, the Asian financial crisis is cited as an example of such volatility shifts under fixed or tightly managed exchange rate regimes.2 On the other hand, to the proponents of more stable exchange rates, exchange rate movements are excessive and often unrelated to economic fundamentals (Cooper, 1999). Exchange rate flexibility may hamper international trade in goods and financial assets by introducing exchange risk. On this view, exchange rate flexibility itself creates noise and additional risks in the economy (McKinnon, 2001 and Nurkse, 1944). We call the transfer of volatility from exchange rates to interest rates the enhanced risk hypothesis, which postulates that the volatilities of exchange rates and interest rates are positively related. When considering the interaction between exchange rates and interest rates, it is necessary to control for the influence of extraneous factors. In the context of East Asia, we consider three major sources of shocks to regional financial markets: the U.S. interest rate, the yen-dollar exchange rate, and the average dollar exchange rate of neighboring countries. First, the U.S. interest rate measured by the federal funds rate sets a basic point of reference in financial markets that are closely linked to those of the U.S. Second, fluctuations in the yen-dollar exchange rate strongly affect the East Asian economies. Indeed, the sharp depreciation of the yen that started in 1995 has been considered to be a contributing factor to the Asian financial crisis.3 Third, the average of the dollar exchange rates of neighboring countries captures the effects of competition amongst the East Asian economies.4 There is a consensus that spillover effects were an important cause of the financial crisis and trade competition a key channel of transmission of shocks in East Asia (see for instance Baig & Goldfajn, 1999; Glick & Rose, 1999). In terms of econometric methodology, we estimate the empirical relationship between exchange rates and interest rates by applying a bivariate vector autoregression–generalized autoregressive conditional heteroskedastic (VAR–GARCH) model to weekly data from each of the four Asian crisis economies.5 We split the sample into two sub-periods, namely the pre-crisis and post-crisis periods, in order to investigate how the dynamics have altered after the crisis. To anticipate the main finding of the paper with regard to the afore-mentioned questions, we found that exchange rate levels are more sensitive to competitors’ exchange rates following the crisis. The post-crisis results also provide evidence to support the volatility tradeoff hypothesis in the short run. Nevertheless, the evidence on the long-term impact of exchange rate flexibility on interest rate stability turns out to be ambiguous. The rest of the article proceeds as follows: the next section contains a preliminary analysis of historical exchange rate and interest rate movements. Section 3 describes the econometric model used to determine the empirical relationship between exchange rates and interest rates. The results are presented and discussed in Section 4. The paper ends in Section 5 with some concluding remarks.
نتیجه گیری انگلیسی
In this paper, we investigate the empirical relationship between the exchange rate and the interest rate for four Asian crisis countries – Indonesia, Korea, the Philippines and Thailand – by applying the bivariate VAR–GARCH model to weekly data. Exogenous variables are introduced to the mean equation to control for the influence of external shocks. The results show increased sensitivity of the domestic exchange rate to competitors’ exchange rates after the crisis, suggesting that transmission of shocks is now a more important factor in exchange rate determination. On the question of whether exchange rate flexibility stabilizes interest rates, there is evidence in the post-crisis period that an increase in exchange rate variability is associated with a short-term decrease in interest rate volatility. However, a consistent long-term relationship between exchange rate flexibility and interest rate variability cannot be found. This result is broadly consistent with Rose (1995) and Baxter and Stockman (1989) in that exchange rate volatility is neither the price of certain intertemporal/intersectoral tradeoff nor to be transmitted to other variables. Our results imply at face value that letting the exchange rate become less flexible does not have to be costly in terms of a long-term increase in interest rate volatility. This concurs with the findings of Artis and Taylor (1994), which demonstrated that the enhanced stability of exchange rates for ERM members was not bought at the expense of increased interest rate volatility. An implication is that the Asian crisis countries can proceed with regional exchange rate coordination to the extent that it is considered useful, without fearing that an attendant reduction in exchange rate variability will result in increased interest rate volatility in their economies. We hasten to add that drawing such an implication may be unwarranted since observed exchange rates and interest rates are presumably distorted due to restrictions on interest rates and international capital flows as well as official intervention in the foreign exchange market. That would be a suitable topic for further study.