This paper examines whether changes in exchange rate arrangements have affected monetary independence in East Asian countries after the 1997 Asian crisis. We find that the sensitivity of local to U.S. interest rates has declined for many Asian countries since they adopted floating exchange rate regimes after the crisis. This empirical finding suggests that the choice of exchange rate regime is an important factor for the independence of monetary policy. Floating regimes appear to offer East Asian countries at least some degree of monetary independence after the East Asian crisis.

Executive Summary

I. Introduction

II. Exchange Rate Regime and Monetary Policy in East Asia
1. Changes in Exchange Rate Regimes
2. Exchange Rate Regimes and Monetary Policy

III. Empirical Test of Monetary Independence in East Asia
1. Basic Specification of the Model
2. The Estimation Technique
3. Data
4. Estimation Results
5. Discussion of the Estimation Results

IV. Concluding Remarks

References