Policy Rate Divergence in the ASEAN-4: Impact of Global Risk Perception and Financial Market Characteristics
Abstract
Monetary policymakers want to know how much influence they can exert over market interest rates. Looking at how far and when benchmark market interest rates are deviating from policy rates provide them with a perspective of how the degree of influence of the central bank’s policy rate over market interest rates changes over time, and help them understand what factors are causing the divergence. The focus and main contribution of this study is that for four small, open emerging market economies of the Association of Southeast Asian Nations (ASEAN), the gap between policy rates and market interest rates follows a Markov-type regime-switching process. In addition, the study finds that some domestic financial market characteristics—particularly the degree of foreign ownership of the relevant money markets, and global factors that drive foreign risk-taking and search for yield—particularly indicators of global risk perception are the significant determinants of the transition probabilities.References
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[31] Sharifuddin, S., and Ling L. 2014. Flattening Yield Curve Amidst Rapid Inflows: The Malaysian Experience. The Evolving Role and Limits of Monetary Policy: New Perspectives for Emerging Market Economies, 28-29 October 2014. Manila, Philippines. Available at: http://www.bsp.gov.ph/events/2014/irc/downloads/papers/2014_ERLMP_04_paper.pdf.
[2] Ahmed, S., Coulibaly, B., and Zlate, A. 2015. International Financial Spillovers to Emerging Market Economies: How Important Are Economic Fundamentals? International Finance Discussion Paper No. 1135, Federal Reserve Board. Available at: http://dx.doi.org/10.17016/IFDP.2015.1135
[3] Aizenman, J., and Ito, H. 2014. Living with the Trilemma Constraint: Relative Trilemma Policy Divergence, Crises, and Output Losses for Developing Countries. Journal of International Money and Finance, 49(Part A): 28-51. Available at: http://dx.doi.org/10.1016/j.jimonfin.2014.05.005
[4] Aizenman, J., Chinn, M., and Ito, H. 2013. The 'Impossible Trinity' Hypothesis in an Era of Global Imbalances: Measurement and Testing. Review of International Economics, 21(3): 447–458. Available at: http://dx.doi.org/10.1111/roie.12047
[5] Bank of Thailand 2013. Foreign exchange policy and intervention under inflation targeting in Thailand. Bank for International Settlements (BIS) Papers No. 73. Market volatility and foreign exchange intervention in EMEs: what has changed? October 2013, 325-333. Available at: http://www.bis.org/publ/bppdf/bispap73y.pdf
[6] Brenner, R., Harjes, R., and Kroner, K. 1996. Another Look at Models of the Short-Term Interest Rate. Journal of Financial and Quantitative Analysis, 31(1): 85-107. Available at: http://dx.doi.org/10.2307/2331388
[7] Cerutti, E., Claessens, S., and Puy, D. 2015. Push Factors and Capital Flows to Emerging Markets: Why Knowing Your Lender Matters More Than Fundamentals. IMF Working Paper No. WP/15/127, International Monetary Fund. Available at: https://www.imf.org/external/pubs/ft/wp/2015/wp15127.pdf
[8] Filardo, A. 1994. Business-Cycle Phases and Their Transitional Dynamics. Journal of Business & Economic Statistics, 12(3): 299-308. Available at: http://dx.doi.org/10.1080/07350015.1994.10524545
[9] Filardo, A. 1998. Choosing Information Variables for Transition Probabilities in a Time-Varying Transition Probability Markov Switching Model. Working Paper No. 98-09, Federal Reserve Bank of Kansas City.
[10] Forbes, K., and Warnock, F. 2012. Capital Flow Waves: Surges, Stops, Flight, and Retrenchment. Journal of International Economics, 88(2): 235-251. Available at: http://dx.doi.org/10.3386/w17351
[11] Ghosh, A., Qureshi, M., Kim, J., and Zalduendo, J. 2014. Surges. Journal of International Economics, 92(2): 266-285. Available at: http://dx.doi.org/doi:10.1016/j.jinteco.2013.12.007
[12] Goldfeld, S., and Quandt, R. 1973. A Markov Model for Switching Regressions. Journal of Econometrics, 1(1): 3-15. Available at: http://www.sciencedirect.com/science/article/pii/0304-4076(73)90002-X
[13] Gray, S. 1996. Modeling the Conditional Distribution of Interest Rates as a Regime-Switching Process. Journal of Financial Economics, 42: 27-62. Available at: http://citeseerx.ist.psu.edu/viewdoc/download? doi=10.1.1.335.3427&rep=rep1&type=pdf
[14] Grenville, S. 2011. The Impossible Trinity and Capital Flows in East Asia. ADBI Working Paper No. 319, Asian Development Bank Institute (ADBI). Available at: http://www.adb.org/sites/default/files/publication/156174/adbi-wp319.pdf
[15] Grenville, S., and Ito, T. 2010. An Independent Evaluation of the Bank of Thailand’s Monetary Policy under the Inflation Targeting Framework, 2000-2010. Bank of Thailand. 2010. Available at: https://www.bot.or.th/Thai/MonetaryPolicy/Documents/GrenvilleItoV10(Oct22).pdf
[16] Hamilton, J. 1988. Rational-Expectations Econometric Analysis of Changes in Regime: An Investigation of the Term Structure of Interest Rates. Journal of Economic Dynamics and Control, 12: 385-423. Available at: http://dx.doi.org/10.1016/0165-1889(88)90047-4
[17] Hamilton, J. 1989. A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle. Econometrica, 57: 357-384. Available at: http://dx.doi.org/10.2307/1912559
[18] HSBC Global Research 2012. Currency Strategy from Currency Weekly, 17 April 2012.
[19] Hsing, Y. 2012. Test of the Impossible Trinity Hypothesis for Five Selected Asian Countries in the Asian and Pacific Regions. Economics Bulletin, 32(1): 616-623. Available at: http://www.accessecon.com/Pubs/EB/2012/Volume32/EB-12-V32-I1-P57.pdf
[20] International Monetary Fund (IMF) 2015. Thailand: IMF Article IV Consultation--Staff Report. 07 May 2015. Available at: https://www.imf.org/external/pubs/ft/scr/2015/cr15114.pdf
[21] Ito, H., and Kawai, M. 2014. New Measures of the Trilemma Hypothesis: Implications for Asia. In: Kawai
[22] Kim, C., and Nelson, C. 1999. Has the U.S. Economy Become More Stable? A Bayesian Approach Based on a Markov-Switching Model of the Business Cycle. Review of Economics and Statistics, 81(4): 608-616. Available at: http://www.mitpressjournals.org/doi/pdf/10.1162/003465399558472
[23] Lamberte, M.B., and Morgan, P.J. (eds), Reform of the International Monetary System: An Asian Perspective, pages 73-104, Springer.
[24] Milesi-Ferretti, G., and Tille, C. 2011. The Great Retrenchment: International Capital Flows during the Global Financial Crisis. Economic Policy, 26” 285-342. Available at: http://www.hkimr.org/uploads/publication/42/ub_ful ... o-38_2011-final-.pdf
[25] Mohanty, M. S., and Turner, P. 2008. Monetary Policy Transmission in Emerging Market Economies: What is New? Bank for International Settlements (BIS) Papers No. 35. Transmission mechanisms for monetary policy in emerging market economies. January 2008, 1-59. Available at: http://www.bis.org/publ/bppdf/bispap35.pdf
[26] Morgan, P. 2013. Monetary Policy Frameworks in Asia: Experience, Lessons, and Issues. ADBI Working Paper No. 435, Asian Development Bank Institute (ADBI). Available at: http://www.adb.org/sites/default/files/publication/156290/adbi-wp435.pdf
[27] Obstfeld, M., Shambaugh, J. C., and Taylor, A. M. 2005. The Trilemma in History: Tradeoffs among Exchange Rates, Monetary Policies, and Capital Mobility. Review of Economics and Statistics, 87: 423-438. Available at: http://www.mitpressjournals.org/doi/pdf/10.1162/0034653054638300
[28] Panigirtzoglou, N., Proudman, J., and Spicer, J. 2000. Persistence and Volatility in Short-term Interest Rates. Bank of England Working Paper No. 116. Available at: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/2000/wp116.pdf.
[29] Rey, H. 2015. Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence. NBER Working Paper No. 21162. Available at: http://dx.doi.org/10.3386/w21162
[30] Rummel, O. 2014. Navigating the Open-Economy Policy Trilemma. Presentation at the Centre for Central Banking Studies (CCBS), Bank of England, 26 March 2014. Available at: http://www.pftac.org/filemanager/files/Macro/CCBS/trilemma.pdf.
[31] Sharifuddin, S., and Ling L. 2014. Flattening Yield Curve Amidst Rapid Inflows: The Malaysian Experience. The Evolving Role and Limits of Monetary Policy: New Perspectives for Emerging Market Economies, 28-29 October 2014. Manila, Philippines. Available at: http://www.bsp.gov.ph/events/2014/irc/downloads/papers/2014_ERLMP_04_paper.pdf.
Published
2016-08-10
How to Cite
FERMO, Laura B..
Policy Rate Divergence in the ASEAN-4: Impact of Global Risk Perception and Financial Market Characteristics.
Theoretical and Practical Research in the Economic Fields, [S.l.], v. 7, n. 1, p. 30-52, aug. 2016.
ISSN 2068-7710.
Available at: <https://journals.aserspublishing.eu/tpref/article/view/319>. Date accessed: 05 july 2022.
Section
Theoretical and Practical Research in the Economic Fields
Keywords
Markov, regime-switching, ASEAN-4, monetary policy, divergence, global risk appetite, Trilemma
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