The Interest Rate-Exchange Rate Nexus in the Asian Crisis Countries

January 1, 2000

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Sharp exchange rate depreciations in the East Asian crisis countries (Indonesia, Korea, and Thailand) raised doubts about the efficacy of increasing interest rates to defend the currency. Using a standard monetary model of exchange rate determination, this paper shows that tighter monetary policy was in fact associated with an appreciation of the exchange rate. Moreover, there is little evidence of higher real interest rates contributing to a widening of the risk premium.

Subject: Demand for money, Depreciation, Exchange rates, Financial services, Foreign exchange, Monetary base, Money, National accounts, Real interest rates, Return on investment

Keywords: Asia currency crisis, Demand for money, Depreciation, East Asia, exchange rate, exchange rate appreciation, exchange rate depreciation, exchange rate dynamics, exchange rate movement, exchange rates, interest rate, interest rates, money demand, Real interest rates, Return on investment, widening risk premium, WP

Pages:
25
Volume:
2000
DOI:
https://doi.org/10.5089/9781451843736.001
Issue:
019
Series:
Working Paper No. 2000/019
Stock No:
WPIEA0192000
ISBN:
9781451843736
ISSN:
1018-5941

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