Engine for Dynamism and Stability
Edited by Masahiro Kawai, Jong-Wha Lee, Peter A. Petri and Giovanni Capanelli
Chapter 9: Monetary Policy and Exchange Rate Stability in East Asia
9. Monetary policy and exchange rate stability in East Asia Ryuzo Miyao Many East Asian countries adopted new monetary policy frameworks after the Asian financial crisis of 1997/98. Most notably, Indonesia, the Republic of Korea (Korea), the Philippines, and Thailand introduced inflation targeting alongside greater currency flexibility through floating exchange rate systems, while Malaysia adopted a fixed exchange rate regime, keeping it in place until July 2005. By targeting inflation, these countries placed more emphasis on price stability in the conduct of monetary policy. Yet, exchange rate stability may still be an important part of monetary policymaking in small, open Asian economies. What role have exchange rate factors played in the conduct of monetary policy since the currency crisis? How has this role changed compared to the pre-crisis period? How do we assess the effects of monetary policy and its overall performance in the new policy framework? The study presented in this chapter empirically addresses these questions and attempts to document dynamic interactions between monetary policy and exchange rate movements in East Asia by using a unified econometric framework. More specifically, a vector-autoregressive (VAR) analysis of the five crisis-hit countries listed above is conducted.1 Note again that four of them adopted inflation targeting/floating exchange rate regimes after the crisis, allowing a sensible comparison. The benchmark analysis consists of four variables: real output, money, exchange rates and short-term interest rates, which is later extended to a five-variable system including prices. Post-crisis as well as pre-crisis sample periods are examined. Comparing empirical...
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