Monetary Policy Independence during Reversal Phases of Domestic-Foreign Interest Rate Differentialsopen accessMonetary Policy Independence during Reversal Phases of Domestic-Foreign Interest Rate Differentials
- Other Titles
- Monetary Policy Independence during Reversal Phases of Domestic-Foreign Interest Rate Differentials
- Authors
- 김경훈
- Issue Date
- Jun-2024
- Keywords
- Monetary Policy Independence; Exchange Rate Stability; Capital Account Openness; Trilemma; Interest Rate Differentials; 통화정책 독립성; 환율 안정성; 자본계정 개방성; 트릴레마; 금리 차이
- Citation
- East Asian Economic Review, v.28, no.2, pp 221 - 244
- Pages
- 24
- Journal Title
- East Asian Economic Review
- Volume
- 28
- Number
- 2
- Start Page
- 221
- End Page
- 244
- URI
- https://scholarworks.bwise.kr/hongik/handle/2020.sw.hongik/33327
- DOI
- 10.11644/KIEP.EAER.2024.28.2.435
- ISSN
- 2508-1640
2508-1667
- 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.
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