IDEAS home Printed from https://ideas.repec.org/a/ris/eaerev/0435.html
   My bibliography  Save this article

Monetary Policy Independence during Reversal Phases of Domestic-Foreign Interest Rate Differentials

Author

Listed:
  • Kim, Kyunghun

    (Hongik University)

Abstract

This study examines how the independence of monetary policy changes in situations where the interest rate differential between domestic and foreign rates inverts, utilizing the trilemma indices. For analysis, this paper uses the trilemma indices developed by Kim et al. (2017) to analyze the relationship between the monetary policy independence index and the other two trilemma indices, namely the capital account openness index and the exchange rate stability index, across 45 countries from 2002 to 2018. The analysis reveals that the trilemma’s validity is contingent. In particular, no statistically significant negative correlation was found between the monetary policy independence index and exchange rate stability index during periods of interest rate differential inversion. A positive correlation emerges between exchange rate stability and the independence of monetary policy, particularly when the inverted interest rate differential exceeds a certain threshold. This situation, where the exchange rate remains stable despite low domestic interest rates, implies that the central bank is effectively managing monetary policy to appropriately respond to economic conditions, which is reflected in the monetary policy independence index.

Suggested Citation

  • Kim, Kyunghun, 2024. "Monetary Policy Independence during Reversal Phases of Domestic-Foreign Interest Rate Differentials," East Asian Economic Review, Korea Institute for International Economic Policy, vol. 28(2), pages 221-244, June.
    • Handle: RePEc:ris:eaerev:0435
    DOI: 10.11644/KIEP.EAER.2024.28.2.435
    as

    Download full text from publisher

    File URL: https://dx.doi.org/10.11644/KIEP.EAER.2024.28.2.435
    File Function: Full text
    Download Restriction: no
    File URL: https://libkey.io/10.11644/KIEP.EAER.2024.28.2.435?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    More about this item

    Keywords

    Monetary Policy Independence; Exchange Rate Stability; Capital Account Openness; Trilemma; Interest Rate Differentials;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ris:eaerev:0435. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: JE Lee (email available below). General contact details of provider: https://edirc.repec.org/data/kieppkr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.