Monetary Policy Responses to the Exchange Rate: Empirical Evidence from Three East Asian Inflation-Targeting Countries

September 2006
Naoto Osawa ^*1

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Abstract

Using monetary policy reaction functions, this paper examines whether monetary policy responds to the exchange rate in three East Asian inflation-targeting countries, namely, Korea, Thailand and the Philippines. Contrary to the results in existing studies, it finds no evidence that monetary policy in these countries responds to the exchange rate. While extant work employs sample periods including the Asian financial crisis between 1997 and 1998, this paper focuses on the inflation-targeting regimes adopted in the period following the crisis. The strong monetary policy response to the exchange rate to defend against currency depreciation during the crisis is found to contribute to the difference in results.

The author is grateful to fellow staff members at the Bank of Japan, especially Koichiro Kamada, Shigeto Nagai, Shinsuke Ohyama, Shigenori Shiratsuka, Wataru Takahashi, and Kenichiro Watanabe, for their helpful comments and suggestions. The views expressed in this paper are those of the author and do not necessarily reflect the views of the Bank of Japan.

• *1 International Department, Bank of Japan
  E-mail: naoto.oosawa@boj.or.jp

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