Journal of Applied Mathematics and Decision Sciences
Volume 2006 (2006), Article ID 35752, 9 pages
Effectiveness of high interest rate policy on exchange rates: A reexamination of the Asian financial crisis
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
Received 25 December 2005; Revised 29 June 2006; Accepted 30 June 2006
Copyright © 2006 Tim Brailsford et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
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.