The impacts of economic structures on the performance of simple policy rules in a small open economy

Applying a stochastic dynamic general equilibrium model, the performance of various simple rules is analyzed in a small open economy context. The aspects that are considered in the analysis include the degree of exchange rate pass-through, trade openness, the policy objective and the source and persistency of shocks. The main objective of this analysis is to investigate if the rule reacts to exchange rate performs better than the basic closed economy rule without exchange rate term. Comparison on the performances is also made between the consumer inflation targeting and domestic inflation targeting rules. The results show that adding the exchange rate term to the policy rule enhances improvement especially in the higher pass-through case. The superior rule is the hybrid rule that reacts to the exchange rate term. CPI inflation targeting rules outperform the domestic inflation targeting rules in term of welfare loss. However, more complicated domestic inflation targeting rules generate lower loss in term of relative loss. On the second part of this chapter, comparisons on the performances of different exchange rate regimes are made under different source and persistency of shocks. The floating (pegged) regime is favored under more prominent real (nominal) shocks. The results suggest that emerging countries that experience very large real shocks should float their exchange rate.simple policy rule, exchange rate pass-through, open economy model

Interactions between monetary policy and exchange rate in inflation targeting emerging countries: the case of three East Asian countries

This paper investigates empirically how the reaction of monetary policy to exchange rate has changed after the adoption of inflation targeting regime in three East Asian countries. Using a structural VAR and single equation methods, this study shows that the reactions of monetary policy to exchange rate shocks as well as CPI (demand shocks) and output (supply shocks) have declined under the inflation targeting environment. The policy function reacts weakly to the exchange rate movements before and after the financial crisis of 1997 in two out of the three countries.exchange rate, inflation targeting, policy reaction function

Economic structures, the nature of shocks and the role of exchange rate in the monetary policy formation in the emerging countries of East-Asia

This thesis investigates the role of exchange rate in a small open economy policy framework. Focusing the analysis on the crisis-hit East-Asian countries, the main objective of this thesis is to investigate the necessity of the monetary authority to concern about the exchange rate stability by reacting directly to the exchange rate movements under the flexible exchange rate regime. This thesis conducts both numerical simulations and empirical analyses and it is organized in six chapters. Chapter One is the introduction about the content of each chapter and the summary of the main findings. Chapter Two is the overview about the economic and monetary policy of East-Asian countries. Chapter Four applies a model of Lindé, Nessén & Söderström (2004) and conducts simulations to compare the performances of various policy rules in terms of policy loss and variations. The remaining chapters are about the empirical analyses, i.e. Chapter Three applies GMM technique and SUR model to estimate the degree of exchange rate pass-through in East-Asia in the pre- and post-crisis of 1997/98, Chapter Five applies GMM technique to estimate the policy reaction function for East-Asia and the last chapter conducts a SVAR model to investigate the change in the economic structure, the dynamic of shocks and the performances of the policy regimes in East-Asian countries. The simulations reveal some evidences on more effective monetary policy rules/ regimes that react directly to the exchange rate terms, taking into account for different degrees of exchange rate pass-through, trade openness, policy objective, the source and persistency of shocks. However, the size of improvements depends on country specific factors. Empirical results report different results for the degree of exchange rate pass-through along the pricing chain, over time and across countries. Besides, there are empirical evidences that the monetary authorities in East-Asian countries influence the exchange rate movements through short-term interest rate adjustments and foreign market intervention under the floating regime aftermath the crisis. Empirical findings indicate that the policy regimes aftermath the crisis is more effective. The source of shocks and the change in the economic structure matters in determining the performances of policy regimes. The empirical results are in line with the theoretical outcomes that favor the reaction to the exchange rate movements under the flexible exchange rate regime in the emerging countries of East-Asia

Exchange rate pass-through and volatility: Impacts on domestic prices in four Asian countries

The paper undertakes a comparative empirical analysis on the effects of shocks on domestic prices in four Asian countries before and after the financial crisis of 1997. We apply two different estimation methodologies, namely a structural VAR and a single equation approach. The results of the two methods are consistent, although the magnitude of the elasticities of the exchange rate pass-through are different due to the inclusion of different variables, lag terms and different assumptions made in both methods. The results show that the degrees of the exchange rate pass-through are different across countries and over time. In most cases, the pass-through rates are incomplete. The degree of the exchange rate pass-through is the highest on import prices, moderate on PPI and is the lowest on CPI. In some cases, the pass-through rates on CPI are even negative. The effect of the import price shock is stronger as compared to that of the exchange rate shock in determining the movement of the domestic prices in these countries. Trade openness has a weak correlation with the degree of the exchange rate pass-through.domestic prices, exchange rate pass-through, SVAR, single equation approach

The impacts of economic structures on the performance of simple policy rules in a small open economy

Applying a stochastic dynamic general equilibrium model, the performance of various simple rules is analyzed in a small open economy context. The aspects that are considered in the analysis include the degree of exchange rate pass-through, trade openness, the policy objective and the source and persistency of shocks. The main objective of this analysis is to investigate if the rule reacts to exchange rate performs better than the basic closed economy rule without exchange rate term. Comparison on the performances is also made between the consumer inflation targeting and domestic inflation targeting rules. The results show that adding the exchange rate term to the policy rule enhances improvement especially in the higher pass-through case. The superior rule is the hybrid rule that reacts to the exchange rate term. CPI inflation targeting rules outperform the domestic inflation targeting rules in term of welfare loss. However, more complicated domestic inflation targeting rules generate lower loss in term of relative loss. On the second part of this chapter, comparisons on the performances of different exchange rate regimes are made under different source and persistency of shocks. The floating (pegged) regime is favored under more prominent real (nominal) shocks. The results suggest that emerging countries that experience very large real shocks should float their exchange rate

Interactions between monetary policy and exchange rate in inflation targeting emerging countries: the case of three East Asian countries

This paper investigates empirically how the reaction of monetary policy to exchange rate has changed after the adoption of inflation targeting regime in three East Asian countries. Using a structural VAR and single equation methods, this study shows that the reactions of monetary policy to exchange rate shocks as well as CPI (demand shocks) and output (supply shocks) have declined under the inflation targeting environment. The policy function reacts weakly to the exchange rate movements before and after the financial crisis of 1997 in two out of the three countries

Evaluating the performance of inflation targeting regime in three Asian economies

We conduct empirical analysis in evaluating the performance of inflation targeting (IT) in three emerging East-Asian economies that have implemented this regime. These three economies are Korea, Philippines and Thailand. The performance of inflation targeting regime is evaluated by comparing the economic achievement and structure changed between the pre- and post- IT periods. In particular, evaluation is focused on the inter-relationship between inflation and output growth / gap in these emerging economies between the preand post-IT periods. The inflation rate and the change in the macroeconomic variables are observed through country specific data. A bivariate GARCH (1,1) model is applied to study the inter-relationship between inflation and output gap. The results also enable us to detect if IT regime induces disinflation cost by causing lower growth or higher output gap. We compare the results of GARCH with the results of structural VAR for robustness checking. Both analyses provide consistent results. We observe lower inflation rate in the post-IT period. However, there is no significant correlation between inflation and output gap and we find no evidence that lower inflation causes lower growth or higher output gap. Both output gap and inflation are determined mainly by their own impulses. Besides, output gap is more persistent than inflation. We conclude that IT regime has improved the economies of these countries

Nominal shocks and current account dynamics: A structural VAR analysis in the Southeast Asian countries

This paper investigates empirically the roles of nominal shocks in determining the fluctuations of current account in four financial crisis hit countries in Asia. Structural VAR models are estimated separately for these economies before and during/after the financial crisis of 1997. The results show that the relative roles played by nominal shocks vary between two periods and across countries. This implies that the determinants of the current account fluctuations are relied on country-specific particularities. Trade openness does not show a significant contribution in explaining these differences

The impacts of economic structures on the performance of simple policy rules in a small open economy

Applying a stochastic dynamic general equilibrium model, the performance of various simple rules is analyzed in a small open economy context. The aspects that are considered in the analysis include the degree of exchange rate pass-through, trade openness, the policy objective and the source and persistency of shocks. The main objective of this analysis is to investigate if the rule reacts to exchange rate performs better than the basic closed economy rule without exchange rate term. Comparison on the performances is also made between the consumer inflation targeting and domestic inflation targeting rules. The results show that adding the exchange rate term to the policy rule enhances improvement especially in the higher pass-through case. The superior rule is the hybrid rule that reacts to the exchange rate term. CPI inflation targeting rules outperform the domestic inflation targeting rules in term of welfare loss. However, more complicated domestic inflation targeting rules generate lower loss in term of relative loss. On the second part of this chapter, comparisons on the performances of different exchange rate regimes are made under different source and persistency of shocks. The floating (pegged) regime is favored under more prominent real (nominal) shocks. The results suggest that emerging countries that experience very large real shocks should float their exchange rate

Investigating the Interaction between the Volatility of Exchange Rate and Stock Returns in Four Asian Countries

In this paper, we are interested to investigate how changes in exchange rate regime/ flexibility can affect the interaction between the volatility of exchange rate and stock returns in four selected Asian countries (Indonesia, Korea, Philippines and Thailand). The reason to focus the study on these countries is due to the drastic change in their exchange rate regime from fixed to flexible regime and inflation targeting aftermath the Asia financial crisis of 1997. In particular, we are interested to investigate the above matter by comparing the results of pre- inflation targeting (IT) and post-IT periods in addition to reveal macroeconomic factors that determine the relationship. For the purpose of analyses, a wide range of generalized autoregressive conditional heteroskedasticity, GARCH-type models are used to model the volatility of exchange rate and stock returns respectively for each country. The generated volatility series are used to be analyzed for the interaction effects under vector autoregressive (VAR) model. Our results detect significant bi-directional relationship between volatility of exchange rate and stock returns in three markets: Indonesia, Korea and Thailand. Also, the monetary variables (interest rate, money supply, international reserves) have significant impacts on determining the volatility of exchange rate and stock returns in Indonesia, Korea and Thailand. In general, the adoption of inflation targeting leads to different significant impacts across the four countries