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Interest Rates and Exchange Rates in the Korean, Philippine, and Thai Exchange Rate Crises

Interest Rates and Exchange Rates in the Korean, Philippine, and Thai Exchange Rate Crises

Chapter:
(p.11) 1 Interest Rates and Exchange Rates in the Korean, Philippine, and Thai Exchange Rate Crises
Source:
Managing Currency Crises in Emerging Markets
Author(s):
Dongchul Cho, Kenneth D. West
Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226155425.003.0003

This chapter examines the relationship between exchange rates and interest rates during the 1997–98 exchange rate crises in Korea, the Philippines and Thailand. It aims to determine whether exogenous monetary-policy-induced increases in the interest rate in these economies cause exchange rate depreciation or appreciation. This chapter proposes a two-equation model for exchange rates and interest rates which include a monetary policy reaction function and an interest parity equation. It explains that increases in interest rates following crises led to exchange rate appreciation in Korea and the Philippines but to depreciation in Thailand.

Keywords:   exchange rates, interest rates, exchange rate crises, Korea, Philippines, Thailand, monetary policy reaction function, interest parity equation

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