Advances in Decision Sciences
Volume 2006 (2006), Article ID 35752, 9 pages
doi:10.1155/JAMDS/2006/35752
Effectiveness of high interest rate policy on exchange rates: A reexamination of the Asian financial crisis
Tim Brailsford1
, Jack H.W. Penm2
and Chin Diew Lai3
1UQ Business School, The University of Queensland, Brisbane QLD 4072, Australia
2School of Finance \& Applied Statistics, College of Business and Economics, The Australian National University, Canberra ACT 0200, Australia
3Institute of Information Sciences and Technology, Massey University, Palmerston North, New Zealand
Abstract
One of the most controversial issues in the aftermath of the Asian financial crisis has been the appropriate response of monetary policy to a sharp decline in the value of some currencies. In this paper, we empirically examine the effects on Asian exchange rates of sharply higher interest rates during the Asian financial crisis. Taking account of the currency contagion effect, our results indicate that sharply higher interest rates helped to support the exchange rates of South Korea, the Philippines, and Thailand. For Malaysia, no significant causal relation is found from the rate of interest to exchange rates, as the authorities in Malaysia did not actively adopt a high interest rate policy to defend the currency.