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

IMF Working Papers, January 1, 2000

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

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Bibliographic details

• Authors: Atish R. Ghosh, Gabriela Basurto
• Published: January 1, 2000
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451843736.001

Summary and principal findings

• 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, the paper shows that tighter monetary policy was in fact associated with an appreciation of the exchange rate.
• There is little evidence that higher real interest rates contributed to a widening of the risk premium.

Methodology and scope

• Analytical approach: standard monetary model of exchange rate determination.
• Country focus: Indonesia, Korea, and Thailand (East Asian crisis countries).

Policy implications and interpretation

• Raising interest rates can be effective in supporting the currency during sharp exchange rate depreciations, consistent with the model’s results showing an appreciation associated with tighter monetary policy.
• Concerns that higher real interest rates would substantially widen risk premia are not strongly supported by the evidence in this study.

Subject areas and keywords

• 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

Content in this bundle

• The Interest Rate-Exchange Rate Nexus in the Asian Crisis Countries - WP/00/19
  • The Interest Rate-Exchange Rate Nexus in the Asian Crisis Countries - WP/00/19 (Markdown version)
  • The Interest Rate-Exchange Rate Nexus in the Asian Crisis Countries - WP/00/19 (PDF)