Week-9

Interest rate autonomy in the presence of exchange rate stability: evidence from 13 selected Asia Pacific countries

Pei-Tha Gan

Department of Economics, Faculty of Management and Economics, Universiti Pendidikan Sultan Idris, Perak, Malaysia

ABSTRACT A notable feature of the empirical research on the interest rate autonomy is that very few studies seek to determine whether the use of interest rate policy to fine-tune the exchange rate misalignments has been undermined by sterilised foreign exchange intervention. To overcome this deficiency, this study uses the open- economy Taylor rule as a policy reaction function in a standard macroeconomic model to specify the measures of independent interest rate policy reacts to the exchange rate and examines the empirical validity based on a sample of 13 selected Asia Pacific countries. Using the generalised method of moments, the findings provide some policy implications; the interest rate instrument can serve as a coordinating function to fine-tune the exchange rate misalignments for improving the macroeconomic stability and serve as an external shock absorber to avoid or mitigate impact of instability in the foreign capital market.

KEYWORDS Exchange rate; foreign exchange intervention; interest rate policy; monetary policy

1. Introduction

Monetary authorities (hereafter, central banks) must remain open to use monetary policy as an additional instrument for addressing economic risk1 – proceeding cautiously and always keeping in mind the inherent difficulties (Bernanke 2010). Undoubtedly, research- ers have been striving to continue investigating how best to make monetary policy and to meet threats to economic stability. A great deal of emphasis has been placed on the clarifi- cation of the connection between the central bank’s policy interest rate and macroeco- nomic goals in contexts where the central bank can determine the interest rate to pursue sustainable economic growth, price stability and low unemployment (Taylor 1993; Deut- sche Bundesbank 1999; Orphanides 2007). In spite of such expensive study, the outcome remains ambiguous and is not reliable with the experience of many central banks. There- fore, an open question remains as to whether further investigation in this area could improve the knowledge about the behaviour of the policy interest rate.

A notable feature of the empirical research on the interest rate autonomy in the pres- ence of exchange rate stability strategy is that very few studies seek to determine whether the use of interest rate policy to fine-tune the exchange rate misalignments has been

CONTACT Pei-Tha Gan [email protected]

© 2017 Informa UK Limited, trading as Taylor & Francis Group

https://doi.org/10.1080/13547860.2017.1408570

JOURNAL OF THE ASIA PACIFIC ECONOMY, 2019 VOL. 23, NO. 3, 393–410

undermined by sterilised foreign exchange intervention.2 Allsopp, Kara, and Nelson (2006) suggest the use of the exchange rate as an indicator for monetary policy because it can affect inflation expectations.3 Therefore, the analysis of interest rate autonomy in the presence of exchange rate stability cannot be used to refute the correctness of interest rate controls over the exchange rate. For instance, Calvo and Reinhart (2002) argue that inter- est rate is a viable instrument to smooth the exchange rate oscillations. Disyatat and Galati (2005) suggest that it is useful to conceptualise the exchange rate as an asset price for monetary policy action. By using the standard macroeconomic model to examine the link between interest rate and exchange rate, Taylor (1999, 2001) finds that the role of exchange rate is important in events of endogenous shocks. Using semi-parametric inter- val forecasting to a group of Taylor rule models, the results of the study by Wang and Wu (2012) conclude that exchange rate predictability is more pronounced at longer horizons.

However, some scholars take a slightly different standpoint in explaining the link between the central bank’s interest rate and exchange rate. For instance, Clarida, Gali, and Gertler (1998) examine the empirical evidence on the monetary policy response to the exchange rate in industrial countries. They find that monetary policy does react to the exchange rate, but the qualitative effects are small. Clarida, Gali, and Gertler (2001) argue that the case of optimal monetary policy in a small open economy is isomorphic to the case of optimal policy in the closed economy. In their view, there is no extraordinary role for the real exchange rate, which is attributed by the determination of the optimal feed- back response in the degree of openness. De Gregorio, Tokman, and Valdes (2005) study monetary policy framework in a developing country, and they suggest that there is no need to give an independent role to the exchange rate in the policy rule because the effects of the exchange rate are already incorporated in the output gap and the inflation gap. Using two- stage least squares method, the results of the study by Osawa (2006) corroborate the find- ings of De Gregorio, Tokman, and Valdes (2005). Osawa (2006) concludes that monetary policy does not respond to the exchange rate movements in Korea, Philippines and Thai- land, which these central banks use foreign exchange reserves to control changes in the exchange rate. On the other hand, Georgiadis and Mehl (2015) examine the monetary pol- icy effectiveness through the Mundell–Fleming model, and they support the view that mon- etary policy impulses can only determine the exchange rate movements under a flexible exchange rate system.

The motivation for this paper stems from the fact that exchange rate adjustments through interest rate control have not been exhausted under sterilised intervention opera- tion (Note according to the managed floating exchange rate theory proposed by Bofinger and Wollmershauser (2001) that describes the new international monetary order, the cen- tral bank has two independent monetary policy instruments, namely the interest rate and the sterilised foreign exchange intervention, which can be used to influence the exchange rate; the exchange rate can be influenced through the interest rate policy and/or the steri- lised foreign exchange intervention policy). Past studies have demonstrated that the cen- tral bank can indirectly influence the exchange rate by using the interest rate (Calrida and Gertler 1997; Dungey and Pagan 2000; Gerlach and Smets 2000; H€ufner 2004). Interest rate still plays a significant role in addressing unknown economic risks (Bernanke 2010).4

In a similar vein, however, studies have also discovered that sterilised foreign exchange intervention would reduce destabilising exchange rate movements (Edison 1993; Kwack 2001; Cavoli and Rajan 2006; Wang 2010). Moreover, as stressed in the studies by

394 P.-T. GAN

Bofinger and Wollmershauser (2001), United Nations (2001) and Hutchison (2003), steri- lised foreign exchange intervention may be significant without changing domestic interest rate policy. Therefore, it seems natural to examine independent interest rate policy, with sterilised foreign exchange intervention policy presumed to remain autonomous, can fine-tune the exchange rate misalignments.

The objective of the paper is to examine the interest rate autonomy in the pres- ence of exchange rate stability strategy (through sterilised foreign exchange inter- vention) such that (i) the interest rate can serve as a good coordinating function to fine-tune the exchange rate misalignments for improving the macroeconomic stabil- ity, and (ii) the interest rate can serve as an external shock absorber to avoid or mitigate impact of instability in the foreign capital market through interest rate control on exchange rate fluctuations without neglecting the role of sterilised for- eign exchange intervention policy (Note that the use of interest rate policy can result in reducing overwhelming dependence on expensive sterilised foreign exchange intervention policy; expensive intervention policy implies that the central bank may need to create a buffer stock of foreign currency reserves5). In doing so, the use of interest rate policy for stabilising the exchange rate should help promote low and stable inflation, and stability of foreign capital market. The 13 selected Asia Pacific countries, Australia, Canada, China, Hong Kong, Indonesia, India, Japan, South Korea, Malaysia, Philippines, Singapore, Thailand and the United States (US), are included in this paper; a policy of sterilised foreign exchange inter- vention is very common in these selected countries (see Bofinger and Wollmer- shauser 2001; Federal Reserve Bank of New York 2007; Gan 2014a; Khemraj 2014).6 This study adopts the open-economy Taylor rule in a standard macroeco- nomic model, which postulates that the interest rate reacts to the exchange rate; in this study, the rule is delineated in the presence of exchange rate stability strategy (see Section 2). Using the generalised method of moments (GMM) technique, the paper examines the interest rate autonomy, by analysing the open-economy Taylor rule in a standard macroeconomic model.

The remainder of the paper is organised as follows. Section 2 describes the theoretical model and choice of econometric methodology. Section 3 describes the data and empirical results. The conclusions are presented in Section 4.

2. Model and econometric methodology

The introduction of the managed floating exchange rate theory proposed by Bofinger and Wollmershauser (2001) to international finance is that both the interest rate and the steri- lised foreign exchange intervention can simultaneously serve as two independent mone- tary policy instruments that can be controlled by the central bank. The unique of this viable form is that the interest rate is used as an instrument to influence the exchange rate that does not neglect the role of an autonomous sterilised foreign exchange intervention policy.7 To avoid a monotonous discussion in the managed floating exchange rate theory, the central bank can either set its interest rate policy (through interventions in open mar- ket operations) or its exchange rate stability policy (through the operations of sterilised foreign exchange intervention) or both, to influence the exchange rate.8 Because the inter- est rate reaction function under the managed floating exchange rate theory and the

JOURNAL OF THE ASIA PACIFIC ECONOMY 395

standard Taylor rule9 augmented with the exchange rate share a common structure (Fratzscher 2005; Hammermann 2005), the paper uses the open-economy Taylor rule.10

The reason may lie in the fact that the Taylor-type rules have been commonly used to explain the central bank’s monetary policy reaction and serve as a guide in assessing and determining the stance of monetary policy (Asso, Kahn, and Leeson 2010). Moreover, a number of empirical studies in open economies have shown that it is norm to include the exchange rate in the interest rate reaction function (Mohanty and Klau 2005; Aizenman, Hutchison and Noy 2011; Ghosh, Ostry, and Chamon, 2016). As described in Equation (1), the open-economy Taylor rule is the standard Taylor rule augmented with the exchange rate, which the interest rate is affected by not only output and inflation but also the exchange rate.

rgt ¼ aygt þ bppgt � degt þ ξt (1)

where rg, yg, pg and eg are the real interest rate gap, the real output gap, the inflation gap and the real exchange rate gap11, respectively; the gap implies the deviations of the actual value from the potential value. a, bp and d are coefficients. ξ is the error term. Because pursuing a publicly announced inflation target may undermine long-term potential inflation target or unknowable future inflation rate, the inflation gap calcu- lated in this study is the difference between the actual inflation rate and the potential trend inflation.12 Carlstrom and Fuerst (2003) argue that the Taylor rule can be adapted for a different inflation target and that changes in inflation target may not erode the credibility of Taylor rule; in principle, the Taylor rule never prescribe pre- cisely the appropriate way to determine the inflation target. Despite this, a Taylor-type reaction function, in general, is an implicit function of the relevant information, and thus, the device will not be a policy reaction function under inflation targeting (Svens- son 1999). Equation (1) suggests that the real interest rate gap is positively related to both the output gap and the inflation gap, but negatively related to the real exchange rate gap.

Compatible with the central bank’s monetary policy strategy, the managed floating exchange rate theory can help make certain that the central bank accomplishes its internal and external equilibriums (Bofinger and Wollmershauser 2001). Internal equi- librium implies that both the interest rate and the sterilised foreign exchange interven- tion can be set in a way to target the inflation rate and to minimise the central bank’s loss function. External equilibrium implies that the exchange rate movements under perfect capital mobility are consistent with uncovered interest parity (UIP) that can help ensure the stability of foreign capital market. Towards achieving these strategic outcomes, on the basis of supporting exchange rate stability, the central bank can influence the exchange rate with its interest rate policy (through interventions in open market operations), which assumes that the UIP assumption is valid, i.e. the efficiency of foreign exchange market. However, if UIP does not hold in reality, the central bank can influence the exchange rate with its exchange rate stability policy (through the operations of sterilised foreign exchange intervention) to achieve constant UIP.13

Indeed, Gan (2014a) argues that the central bank can fine-tune the disruptions in the foreign capital market via sterilised foreign exchange intervention on exchange rate misalignments.

396 P.-T. GAN

2.1. Theoretical model

Departing from the empirical literature, this paper uses the open economy backward- looking Taylor rule in a standard macroeconomic model described by Svensson (2000) for analysis and interpretation (Note that the backward-looking Taylor rule as described in Equation (5) does not vary significantly compared to the contemporaneous Taylor rule as described in Equation (1) except that the backward-looking Taylor rule is reassembled on the premise of the monetary policy transmission mechanism that follows a distinctive lag pattern). Among other scholars, this standard macro model is employed by Ball (1999), Jondeau and Bihan (2002), Martin and Milas (2009) and Gan (2014b). The stan- dard macroeconomic model can be characterised by the following linear equations:

ygt ¼ /1 ygt�1 � λ1rgt�1 � d1egt�1 þ et (2) pgt ¼ /2 ygt�1 þ bp1pgt�1 � d2egt�1 þ ht (3) egt ¼ λ2 rgt þ yt (4) rgt ¼ /3 ygt�1 þ bp2pgt�1 � d3egt�1 þ zt (5)

The structural model above nests three backward-looking models, i.e. Equation (2), Equation (3) and Equation (5), and a contemporaneous model, i.e. Equation (4). All varia- bles are measured in logarithmic form, except for the inflation gap and the real interest rate gap. et, ht, ytand zt are a shock in demand, a shock in supply, the shock to the exchange rate and the monetary policy shocks, respectively. The above model also comes with a caveat that the accuracy of the underlying economic theory for each related variable is necessary for each function in the model.

Equation (2) and Equation (3) are IS curve (or equally demand side of the economy) and Phillips curve (or equally supply side of the economy), respectively. The former shows that the output gap is positively related to its own past value, but negatively related to both the real interest rate gap and the real exchange rate gap, whereas the latter states that the change in inflation is positively related to both the output gap (i.e. level of activity) and the past value of itself (i.e. inflation shock), but negatively related to the real exchange rate gap. The reduced form of the exchange rate, given in Equation (4), shows that the real exchange rate gap is positively related to the real interest rate gap, which assumes that a higher interest rate tends to induce capital inflows, leading to appreciation (Ball 2000).

2.2. Methodology

This section explains the GMMthat is applied in estimating the open-economy Taylor rule in a standard macroeconomic model. Following convention, system GMM has been exten- sively used to estimate macroeconomic models (Smets 2003; Cerme~no, Villag�omez, and Polo 2012; Han 2014). Because all equations of a standard macroeconomic model from Subsection 2.1 are related, system GMM estimation takes into account the interdependen- cies (i.e. cross-correlations) among the equations in the system, and thus, the system GMM estimator is consistent, efficient and unbiased (Favero and Rovelli 2003; Rodr�ıguez 2008).

To carry out this method, we write the system in a general matrix form, xt ¼ bxt�1 þ Y t. Because the standard macroeconomic model includes a

JOURNAL OF THE ASIA PACIFIC ECONOMY 397

contemporaneous component, the general matrix form should be modified into the fol- lowing state-space model form:

a1 xt ¼ a2 xt�1 þ et (6)

Thereby,

1 0 0 0

0 1 0 0

0 0 1 �λ2 0 0 0 1

2 6664

3 7775

ygt pgt egt rgt

2 6664

3 7775 ¼

/ 1 0 �d1 �λ1 / 2 bp1 �d2 0 0 0 0 0

/ 3 bp2 �d3 0

2 6664

3 7775

ygt�1 pgt�1 egt�1 rgt�1

2 6664

3 7775 þ

et ht yt

zt

2 6664

3 7775

with V as the covariance matrix associated with e, V ¼ E ee0 � �

. This model can equally well be written xt ¼ bxt�1 þ Y t, with b � a�11 a2, Y � a�11 et and S ¼ E YY 0

� � ¼ a�11 V a�11

� �0 ; V is the identity matrix, and S ¼ E YY 0

� � ¼ a�11 V

a�11 � �0

is the covariance matrix associated with the error terms Y . Therefore, estimat- ing Equation (6), i.e. the system, estimates b, Y and e.

As shown above, the system has a set of theoretical relation that the parameters should satisfy, which is usually orthogonality conditions between nonlinear function of the parameters f uð Þ and a set of instrumental variables Z:

E f uð Þ0Z h i

¼ 0 (7)

From Equation (7), the moment condition is described by Equation (8).

E m a1x; uð Þ½ � ¼ 0 (8)

where m a1x; uð Þ ¼ f uð Þ 0 Z, m is a proxy of the sample moments and u is a proxy of the

parameters of interest. Because over-identification can allow testing of the underlying eco- nomic theory, i.e. there are more restrictions m than parameters u that need to identify the structural model, the GMM estimator is defined by minimising the following criterion function:

J uð Þ ¼ m a1x; uð Þð Þ 0 S m a1x; uð Þ (9)

S is a weighting matrix that weights each moment condition. The symmetric positive defi- nite matrix S will yield a consistent estimate of u. In applications, the moment condition has the specific form:

E m a1x; uð Þ½ � ¼ E Z 0 e a1x; uð Þ

h i ¼ 0 (10)

with e a1x; uð Þ as the residuals of a regression equation. E Z0e a1x; uð Þ � �

¼ 0 implies that the instruments are uncorrelated with the error term of the model.

398 P.-T. GAN

3. Data and empirical results

3.1. Data

The data used in the present paper are on quarterly basis and cover 13 selected Asia Pacific countries over the period from quarter one 1994 to quarter one 2016; the 13 selected countries are Australia, Canada, China, Hong Kong, Indonesia, India, Japan, South Korea, Malaysia, Philippines, Singapore, Thailand and the USA. There are four endogenous variables, namely real output gap, inflation gap, real exchange rate gap and real interest rate gap. The gap implies the deviations of the actual value from the potential value; the potential value is calculated using a Hodrick–Prescott (HP) filter on actual value. Data sources are mainly from the Bank for International Settlements Statistics (BIS Statistics) published by Bank for International Settlements (BIS) and the International Financial Statistics (IFS) published by International Monetary Fund (IMF), see Table 1 for details on the data definitions.

The Phillips–Perron test for unit root, in this paper, is used to evaluate the nature of the non-stationary in variables (i.e. egt , pgt , rgt and ygt ); for which the null hypothesis is non- stationary. The results of the Phillips-Perron test are reported in Table 2. The unit root test suggests that all variables are I (0), i.e. integrated of order zero.

3.2. Results and discussion

This section assesses the interest rate reaction function under the assumption that the interest rate policy remains autonomous in the presence of exchange rate stability strategy to influence the exchange rate across 13 selected Asia Pacific countries. Using the system GMM technique as discussed in Subsection 2.2, the standard structural macroeconomic model can help to describe the dynamics of the economy. Table 3 presents estimation results for the system with the open-economy Taylor rule. The results of interest rate reac- tion function demonstrate that the estimated parameters for all the explanatory variables (i.e. the real interest rate gap, the real output gap, the inflation gap and the real exchange rate gap) have the expected sign and are significant. Because the estimated parameters for three other equations of the system (i.e. the demand side of the economy, the supply side

Table 1. Data. Variable Data and source

Exchange rate The real exchange rate used in this study is the Real Effective Exchange Rate (REER) index, in which an increase in the index implies an appreciation. The quarterly series of the REER index is taken from BIS Statistics. The real exchange rate gap, egt , is measured as the deviation of the log of current real exchange rate from its potential value, which is then multiplied by 100 to convert to percentage.

Inflation The inflation rate is the percentage change in the Consumer Price Index (CPI) level from the previous period. The quarterly series of the CPI is taken from IFS. The inflation gap, pgt , is measured as the deviation of current inflation rate from its potential value.

Interest rate The real interest rate used in this study is the real Money Market Rate (MMR). The real interest rate is the nominal MMR minus the inflation rate. The quarterly series of the nominal MMR is taken from IFS. The real interest rate gap, rgt , is measured as the deviation of current real interest rate from its potential value.

Output The real output used in this study is the real Gross Domestic Output (GDP). To obtain the real output, the nominal GDP is divided by the CPI; the quarterly series of the nominal GDP is taken from IFS. The output gap, ygt , is measured as the deviation of the log of current real output from its potential value, which is then multiplied by 100 to convert to percentage.

JOURNAL OF THE ASIA PACIFIC ECONOMY 399

Table 2. Phillips–Perron test for unit root. Variables

egt pgt rgt ygt Australia Level ¡3.910 � [4] ¡8.357 �� [5] ¡5.111 �� [1] ¡3.743 �� [7] First difference ¡10.26 �� [14] ¡20.85 �� [5] ¡12.96 �� [10] ¡10.25 �� [7] Decision I (0) I (0) I (0) I (0) Canada Level ¡4.191 �� [2] ¡8.918 �� [3] ¡4.850 �� [1] ¡3.557 �� [3] First difference ¡9.534 �� [11] ¡20.86 �� [17] ¡15.22 �� [20] ¡6.706 �� [9] Decision I (0) I (0) I (0) I (0) China Level ¡3.853 �� [3] ¡5.724 �� [4] ¡4.500 �� [4] ¡2.572 � [5] First difference ¡10.20 �� [10] ¡11.38 �� [0] ¡11.11 �� [2] ¡5.390 �� [4] Decision I (0) I (0) I (0) I (0) Hong Kong Level ¡3.774 �� [1] ¡12.56 �� [15] ¡7.143 �� [2] ¡7.422 �� [3] First difference ¡9.241 �� [7] ¡48.81 �� [15] ¡34.21 �� [21] ¡16.56�� [14] Decision I (0) I (0) I (0) I (0) India Level ¡1.984 � [10] ¡10.10 �� [16] ¡4.643 �� [5] ¡8.359 �� [8] First difference ¡6.597 �� [2] ¡19.60 �� [11] ¡8.819 �� [3] ¡15.58 �� [3] Decision I (0) I (0) I (0) I (0) Indonesia Level ¡4.002 � [3] ¡4.823 �� [5] ¡3.538 � [3] ¡4.393 �� [5] First difference ¡7.390 �� [8] ¡16.71 �� [12] ¡9.105 �� [1] ¡15.08 �� [18] Decision I (0) I (0) I (0) I (0) Japan Level ¡3.488 � [4] ¡11.33 �� [5] ¡10.20 �� [1] ¡3.857 � [1] First difference ¡9.584 �� [4] ¡59.14 �� [22] ¡51.14 �� [24] ¡11.33 �� [4] Decision I (0) I (0) I (0) I (0) Malaysia Level ¡3.518 �� [1] ¡9.812 �� [18] ¡5.278 �� [0] ¡4.107 �� [8] First difference ¡8.448 �� [7] ¡15.47 �� [3] ¡14.56 �� [14] ¡8.788 �� [3] Decision I (0) I (0) I (0) I (0) Philippines Level ¡4.131 �� [0] ¡7.653 �� [5] ¡5.612 �� [11] ¡30.52 �� [26] First difference ¡ 8.161�� [5] ¡28.39 �� [24] ¡21.53 �� [25] ¡56.08 �� [13] Decision I (0) I (0) I (0) I (0) Singapore Level ¡3.123 �� [0] ¡6.895 �� [1] ¡4.327 �� [1] ¡4.232 �� [4] First difference ¡9.587 �� [4] ¡17.84 �� [6] ¡10.75 �� [4] ¡12.69 �� [18] Decision I (0) I (0) I (0) I (0) South Korea Level ¡3.849 �� [3] ¡10.65 �� [9] ¡4.730 �� [5] ¡8.241 �� [5] First difference ¡9.600 �� [1] ¡49.89 �� [27] ¡18.30 �� [29] ¡36.60 �� [15] Decision I (0) I (0) I (0) I (0) Thailand Level ¡4.122 �� [6] ¡8.180 �� [23] ¡3.849 � [0] ¡5.555 �� [5] First difference ¡11.48 �� [18] ¡24.17 �� [21] ¡8.795 �� [6] ¡19.67 �� [19] Decision I (0) I (0) I (0) I (0) US Level ¡4.060 �� [1] ¡7.836 �� [3] ¡4.016 � [2] ¡3.602 �� [7] First difference ¡9.116 �� [7] ¡17.27 �� [17] ¡10.54 �� [3] ¡8.790 �� [3] Decision I (0) I (0) I (0) I (0)

Source: Author’s calculation using software package Eviews 9.5. Notes: The symbols �� and � indicate the rejection of the unit root hypothesis at the 1% and 5% levels, respectively. Numbers in brackets indicate bandwidth; the bandwidth is selected based on the Newey–West method using the Bartlett Kernel.

400 P.-T. GAN

Ta b le 3.

G M M es ti m at io n of

th e op en -e co no m y Ta yl or

ru le in a st an d ar d m ac ro ec on om

ic m od el .

C ou nt ri es

D ep en de nt

va ri ab le

In d ep en de nt

va ri ab le (s )

Pa ra m et er

A us tr al ia

C an ad a

C hi na

H on g Ko ng

In d ia

In d on es ia

Ja p an

M al ay si a

y g t

y g t�

1 /

1 0. 83 7 �� �

(0 .0 63 )

1. 17 4 �� �

(0 .1 32 )

1. 15 2 �� �

(0 .0 72 )

0. 09 7 �� �

(0 .0 25 )

0. 06 2 �� �

(0 .0 21 )

0. 52 4 �� �

(0 .0 47 )

0. 38 6 �� �

(0 .0 42 )

0. 97 8 �� �

(0 .0 39 )

r g t�

1 λ 1

¡0 .6 38

�� �

(0 .1 80 )

¡0 .3 18

�� �

(0 .0 94 )

¡0 .1 75

��

(0 .0 79 )

¡1 .1 00

��

(0 .4 30 )

¡0 .0 98

�� �

(0 .0 24 )

¡0 .6 80

�� �

(0 .0 94 )

¡0 .3 20

�� �

(0 .0 89 )

¡0 .4 93

�� �

(0 .1 04 )

e g t �1

d 1 ¡0

.0 72

�

(0 .0 39 )

¡0 .3 16

��

(0 .1 49 )

¡0 .6 30

�� �

(0 .1 08 )

¡0 .9 10

�� �

(0 .1 20 )

¡0 .0 41

�� �

(0 .0 07 )

¡0 .1 00

�� �

(0 .0 31 )

¡0 .0 29

�� �

(0 .0 06 )

¡0 .1 32

��

(0 .0 57 )

p g t

y g t�

1 /

2 0. 06 9 �� �

(0 .0 12 )

0. 06 3 �

(0 .0 35 )

0. 04 3 �� �

(0 .0 05 )

0. 06 7 �� �

(0 .0 07 )

0. 08 4 �� �

(0 .0 04 )

0. 29 3 �� �

(0 .0 47 )

0. 03 5 �

(0 .0 20 )

0. 04 2 �� �

(0 .0 03 )

p g t �1

b p 1

0. 11 7 ��

(0 .0 54 )

0. 11 9 �

(0 .0 68 )

0. 54 9 �� �

(0 .0 14 )

0. 33 6 �

(0 .0 65 )

0. 05 6 �

(0 .0 30 )

0. 19 8 ��

(0 .1 04 )

0. 20 3 �

(0 .1 17 )

0. 05 3 �

(0 .0 30 )

e g t �1

d 2 ¡0

.0 16

�� �

(0 .0 05 )

¡0 .0 72

�� �

(0 .0 20 )

¡0 .0 21

�� �

(0 .0 05 )

¡0 .0 82

��

(0 .0 08 )

¡0 .0 22

��

(0 .0 09 )

¡0 .1 13

�� �

(0 .0 23 )

¡0 .0 10

�� �

(0 .0 03 )

¡0 .0 19

�� �

(0 .0 03 )

e g t

r g t

λ 2 0. 85 5 �� �

(0 .2 99 )

0. 95 3 �

(0 .5 31 )

0. 58 8 �� �

(0 .0 44 )

0. 31 6 �� �

(0 .0 57 )

0. 98 3 �� �

(0 .1 49 )

0. 68 2�

��

(0 .2 27 )

0. 92 3 �� �

(0 .3 91 )

0. 66 5 �

(0 .3 74 )

r g t

y g t�

1 /

3 0. 09 6 �

(0 .0 53 )

0. 76 6 �� �

(0 .1 16 )

0. 31 9 �� �

(0 .0 31 )

0. 15 3 ��

(0 .0 62 )

0. 91 6 �� �

(0 .2 37 )

0. 28 0 ��

(0 .1 17 )

0. 13 5 �� �

(0 .0 51 )

0. 08 0 �� �

(0 .0 30 )

p g t �1

b p 2

0. 44 6 �� �

(0 .0 85 )

0. 32 8 �

(0 .1 77 )

0. 51 9 �� �

(0 .1 59 )

0. 49 6 �� �

(0 .1 41 )

1. 08 5 �� �

(0 .2 16 )

0. 93 8 �� �

(0 .1 26 )

0. 16 9 �� �

(0 .0 39 )

1. 32 9 �� �

(0 .3 37 )

e g t �1

d 3 ¡0

.0 47

�� �

(0 .0 17 )

¡0 .1 45

�� �

(0 .0 52 )

¡0 .2 01

�� �

(0 .0 29 )

¡0 .1 94

��

(0 .0 86 )

¡0 .2 22

�� �

(0 .0 34 )

¡0 .1 31

�� �

(0 .0 41 )

¡0 .0 10

��

(0 .0 04 )

¡0 .2 12

�� �

(0 .0 71 )

J- st at is ti c

0. 24 0

0. 18 6

0. 24 9

0. 23 1

0. 26 3

0. 13 7

0. 24 4

0. 21 9

H an se n’ s J- st at is ti c

20 .3 86

15 .8 12

21 .1 71

18 .9 66

10 .2 47

11 .6 12

20 .7 78

18 .6 42

p- V al ue

0. 67 5 #

0. 14 8 #

0. 93 9 #

0. 98 6 #

0. 92 4 #

0. 11 9 #

0. 83 6 #

0. 54 5 #

C ou nt ri es

D ep en de nt

va ri ab le

In d ep en d en t va ri ab le (s )

Pa ra m et er

Ph ili p p in es

Si ng

ap or e

So ut h Ko re a

Th ai la nd

U S

y g t

y g t�

1 /

1 0. 16 1 �� �

(0 .0 45 )

0. 73 5 �� �

(0 .0 23 )

0. 80 2 �� �

(0 .0 71 )

0. 59 5 �� �

(0 .0 46 )

0. 88 7 �� �

(0 .0 50 )

r g t�

1 λ 1

¡0 .5 50

�� �

(0 .1 69 )

¡0 .5 24

�� �

(0 .1 57 )

¡0 .7 89

�� �

(0 .2 08 )

¡0 .9 14

�� �

(0 .2 40 )

¡0 .2 31

�� �

(0 .0 60 )

e g t �1

d 1 ¡0

.0 87

��

(0 .0 40 )

¡0 .3 93

�� �

(0 .0 63 )

¡0 .0 94

�

(0 .0 48 )

¡0 .1 26

��

(0 .0 52 )

¡0 .0 52

�� �

(0 .0 14 )

p g t

y g t�

1 /

2 0. 04 6 �� �

(0 .0 03 )

0. 02 8 �� �

(0 .0 03 )

0. 22 6 �� �

(0 .0 57 )

0. 10 3 �� �

(0 .0 08 )

0. 17 5 �� �

(0 .0 37 )

(c on tin ue d )

JOURNAL OF THE ASIA PACIFIC ECONOMY 401

Ta b le 3. (C on tin ue d )

C ou nt ri es

D ep en de nt

va ri ab le

In d ep en d en t va ri ab le (s )

Pa ra m et er

Ph ili p p in es

Si ng

ap or e

So ut h Ko re a

Th ai la nd

U S

p g t �1

b p 1

0. 26 9 �� �

(0 .0 49 )

0. 21 2 �� �

(0 .0 13 )

0. 46 4 �� �

(0 .1 63 )

0. 30 3 �� �

(0 .0 58 )

0. 36 8 �� �

(0 .0 79 )

e g t �1

d 2 ¡0

.0 25

�� �

(0 .0 05 )

¡0 .0 66

�� �

(0 .0 05 )

¡0 .0 67

��

(0 .0 26 )

¡0 .0 16

�� �

(0 .0 04 )

¡0 .1 38

�� �

(0 .0 42 )

e g t

r g t

λ 2 0. 72 8 �

(0 .3 92 )

0. 85 1 �� �

(0 .1 17 )

0. 94 8 �

(0 .4 89 )

0. 33 3 �� �

(0 .1 22 )

0. 59 5 �� �

(0 .2 07 )

r g t

y g t�

1 /

3 0. 47 5 �� �

(0 .1 03 )

0. 01 8 �

(0 .0 10 )

0. 04 8 ��

(0 .0 22 )

0. 13 1 �� �

(0 .0 23 )

0. 42 1 �� �

(0 .0 52 )

p g t �1

b p 2

0. 99 6 �� �

(0 .2 77 )

0. 26 0 �

(0 .1 48 )

1. 36 1 �� �

(0 .1 78 )

0. 62 7 �� �

(0 .0 87 )

0. 36 8 �� �

(0 .0 55 )

e g t �1

d 3 ¡0

.1 60

��

(0 .0 67 )

¡0 .0 51

�

(0 .0 26 )

¡0 .0 70

�� �

(0 .0 21 )

¡0 .0 73

��

(0 .0 30 )

¡0 .0 44

��

(0 .0 18 )

J- st at is ti c

0. 24 8

0. 25 3

0. 23 9

0. 22 7

0. 22 2

H an se n’ s J- st at is ti c

21 .0 55

21 .4 69

20 .2 74

19 .2 88

18 .8 67

p -v al ue

0. 45 6 #

0. 99 7 #

0. 77 8 #

0. 11 4 #

0. 12 7 #

So ur ce :A ut ho r’s

ca lc ul at io n us in g so ft w ar e p ac ka g e Ev ie w s 9. 5.

N ot es :T he

sy m bo ls

�� � ,

�� ,a nd

� in d ic at e st at is ti ca ls ig ni fi ca nc e at th e 1%

,5 % ,a nd

10 % le ve ls ,r es pe ct iv el y. N um

be rs in p ar en th es es

in d ic at e st an d ar d er ro rs .T he

es ti m at es

ab ov e in cl ud

e th e

la gg

ed va lu es

of th e en d og en ou s va ri ab le s as

in st ru m en ta lv ar ia b le s; th es e en d og en ou s va ri ab le s ar e th e re al ou tp ut

g ap ,t he

in fl at io n g ap ,t he

re al in te re st ra te g ap

an d th e re al ex ch an g e

ra te g ap .H

an se n’ s (1 98 2) J- st at is ti c is us ed

to te st th e nu

ll hy po th es is th at th e ov er -i d en ti fi ca ti on

re st ri ct io ns

ar e va lid ;t he

sy m bo l#

in d ic at es

no n- re je ct io n of th e nu

ll hy p ot he si s at th e 5%

le ve l. Fr om

th e so ft w ar e p ac ka g e Ev ie w s 9. 5, H an se n’ s J- st at is ti c is ob ta in ed

b y m ul ti p ly in g th e Ev ie w s J- st at is ti c b y th e nu m b er of ob se rv at io ns .

402 P.-T. GAN

of the economy and the reduce form of the exchange rate) are significant and have the expected sign, these results reaffirm the reliability of the central bank’s interest rate policy reaction function. Undoubtedly, the structural macroeconomic model defined by equation system, i.e. Equation (6), incorporates interdependencies among the real interest rate gap, the real output gap, the inflation gap and the real exchange rate gap. Additionally, accept- ing the null hypothesis of the over-identification restrictions suggests that the instruments are exclusively affecting inference in system GMM estimation of structural macroeco- nomic model.

In line with the paper’s premise of the importance of interest rate autonomy, we also investigate the robustness of the results of interest rate policy via the size of weights in the adjustment factors, i.e. the real exchange rate gap, the real output gap and the inflation gap.14 Because research on the Taylor rules does not provide substantial fundamental for selecting the size of weights in the adjustment factors, unequal weights selection may be more applicable if one goal (i.e. aim to stabilise adjustment factor) is to be emphasised over the other (Kozicki 1999; Hofmann, and Bogdanova 2012). This study tests the size of weights proposed by Kozicki (1999) with two different null hypotheses of the responsive- ness of the policy interest rate, namely, fairly modest policy response and more aggressive policy response; specifically, fairly modest policy response is the expectation that the weight on the adjustment factor is 0.5, and more aggressive policy response is the expecta- tion that the weight on the adjustment factor is 1.0 (Note that rejecting the null hypothesis of fairly modest policy response and the null hypothesis of more aggressive policy response imply active policy response). From the system estimation results as demon- strated in Table 3, the Chi-squared statistics computed from the interest rate reaction function estimates using the Wald test are reported in Table 4; the Wald test is used to test the significance of individual parameter in a statistical model.

From Table 4, the summary results of the x2-tests of the value of the parameter on the real exchange rate gap (i.e. d3 = 0.5 and d3 = 1.0) suggest that these selected countries have implemented active policy response to the real exchange rate gap. A similar finding is also found in the x2-tests of the value of the parameter on the real output gap (i.e. / 3 = 0.5 and / 3 = 1.0), the summary results suggest that all the countries are likely to adopt active policy response to the real output gap, except India, Philippines and the USA; India appears to be more aggressive policy response, Philippines and the USA appear to be fairly modest policy response. The summary results of the x2-tests of the value of the parameter on the inflation gap (i.e. bp2 = 0.5 and bp2 = 1.0) for all of the selected countries, however, seems rather mixed. For instance, Japan, South Korea and the USA have an active policy response of the real interest rate gap to the inflation gap. India, Indonesia, Malaysia and the Philippines show more aggressive policy response of the real interest rate gap to the inflation gap. Australia, Canada, China, Hong Kong, Singapore and Thailand have a fairly modest policy response of the real interest rate gap to the inflation gap.

The following findings are drawn from the above analysis. First, the empirical results of the interest rate reaction function suggest the existence of equilibrium relationship among rg, yg, pg and eg; the empirical results for the demand side of the economy, the supply side of the economy and the reduce form of the exchange rate also suggest the existence of equilibrium relationship between the dependent variable and the independent variable (s). Consistent with this finding, the central bank can reduce its policy interest rate in response to real exchange rate appreciation, implying that the interest rate can be set in a

JOURNAL OF THE ASIA PACIFIC ECONOMY 403

way through the exchange rate to help promote low and stable inflation as well as to achieve the stability of foreign capital market.15 In line with this response, the central bank can also use the interest rate to influence domestic variables, such as output and inflation, to support domestic economy. Considering that the estimated parameter on the real exchange rate gap is almost smaller, however, that the presence of simultaneity (recip- rocal causation), the true response of the policy interest rate to the exchange rate can be larger; the concept of simultaneity illustrates that if the central bank reduces policy inter- est rate in response to real exchange rate appreciation, then a higher interest rate will lead to an appreciation of the real exchange rate (see Table 3). Additionally, movements in the exchange rate have important implications in both the real output gap and the inflation gap. In other words, a devaluation of the real exchange rate is associated with an increase in aggregate demand and an increase in inflation.

Second, the empirical results on the robustness of the interest rate policy with respect to the weights embedded in the real exchange rate gap adjustment factor suggest an active monetary policy response to the exchange rate (see Table 4); a consequence of the general increase in international capital mobility and the sudden reversals of capital flows that led to forced adjustment of exchange rate to eliminate any misalignments, which brought a decline in the level and volatility of inflation, and a reduction in uncertainty in the foreign capital market16 (Mussa et al. 2000).17 On the other hand, although the results with respect to the weights embedded in the real output gap and the inflation gap adjustments are rather mixed, the findings do not imply that both adjustment factors (i.e. the real out- put gap and the inflation gap) have played a negligible role. For instance, the presence of an active monetary policy response to the output gap in most of the selected countries indicates that the central banks do care about minimising business cycle fluctuations of

Table 4. Robustness tests assess the responsiveness of the policy interest rate to different weights across adjustment factors based on the Wald statistic.

Size of weights

/ 3 bp2 d3

Countries 0:5 1:0

Decision on policy

response 0:5 1:0

Decision on policy

response 0:5 1:0

Decision on policy

response

Australia [57.98]��� [290.3]��� AP [0.396] [42.02]��� FMP [1076.9]��� [3946.3]��� AP Canada [5.217] �� [4.057]�� AP [0.944] [14.44]��� FMP [153.4]��� [483.2] ��� AP China [33.57]��� [473.3]��� AP [0.014] [9.154]��� FMP [573.7]��� [1684]��� AP Hong Kong [30.97]��� [184.4]��� AP [0.001] [12.84]��� FMP [64.37]��� [190.6] ��� AP India [3.100]� [0.123] MAP [7.338]��� [0.155] MAP [451.6]��� [1294]��� AP Indonesia [3.521]� [37.65]��� AP [12.05]��� [0.237] MAP [232.2] ��� [746.3]��� AP Japan [50.93]��� [286.4]��� AP [73.13]��� [460.7]��� AP [14366]��� [56305]��� AP South Korea [407.8]��� [1809.0]��� AP [23.51]��� [4.138]�� AP [712.0]��� [2507.8]��� AP Malaysia [199.6]��� [956.8]��� AP [6.075]�� [0.958] MAP [99.38]��� [288.1]��� AP Philippines [0.060] [25.94]��� FMP [3.199]� [0.000] MAP [98.57]��� [304.4]��� AP Singapore [2531]��� [10501]��� AP [2.620] [24.94]��� FMP [456.0]��� [1656.7]��� AP Thailand [257.8]��� [1429.5]��� AP [2.129] [18.38]��� FMP [355.7]��� [1247.1]��� AP US [2.276] [123.2]��� FMP [5.829]�� [134.0]��� AP [895.2]��� [3297.6]��� AP

Source: Author’s calculation using software package Eviews 9.5 Notes: The symbols ���, ��, and � indicate statistical significance at the 1%, 5%, and 10% levels, respectively. Two differ- ent null hypotheses of the responsiveness of the policy interest rate are examined, i.e. fairly modest policy response is the expectation that the weight on the adjustment factor is 0.5, and more aggressive policy response is the expec- tation that the weight on the adjustment factor is 1.0; [] is the chi-squared statistic; FMP and MAP denote fairly mod- est policy response and more aggressive policy response, respectively. Rejecting the null hypothesis of fairly modest policy response and the null hypothesis of more aggressive policy response imply active policy response; AP denotes active policy response. Active policy response also means that the responsiveness of the interest rate to the respec- tive adjustment factor is rejected by the weight with larger magnitudes (1.5 and 2.0); however, this table presents only a short summary of the results because the complete results require more space than is allowed here.

404 P.-T. GAN

output around its potential level; the Philippines and the USA show a fairly modest mone- tary policy response to the output gap, which would most likely be best explained with an objective of the monetary policy decision that concerned more on inflation than growth.18

In terms of the responsiveness of monetary policy to inflation gap, the central banks have always stayed accommodative on inflation uncertainties to support economic activity (Mishkin 2016).

With respect to the implications for policy and practice, the paper suggests that the interest rate instrument in the presence of exchange rate stability strategy can function as (i) a good coordinating function to fine-tune the exchange rate misalignments for improv- ing the macroeconomic stability and (ii) an external shock absorber to avoid or mitigate impact of instability in the foreign capital market through interest rate control on exchange rate fluctuations without neglecting the role of sterilised foreign exchange inter- vention, which eventually promotes low and stable inflation, and stability of foreign capi- tal market. By examining the reaction process on the open-economy Taylor rule, this paper suggests that the central banks are not only cared about exchange rate but also cared about output and inflation. Moreover, although the exchange rate stability strategy (through sterilised foreign exchange intervention) is not considered to be an explicit mea- sure of this study, it is considered to be a useful alternative way to support monetary pol- icy operations, in the event of interest rate instrument malfunctioning; in order to attain domestic monetary objectives (e.g. low and stable inflation), and to bring certain stability to foreign capital markets19 (Bofinger and Wollmershauser 2001). This may be a possible explanation of why most of the instability in the domestic indicators can be explained by external factor (Solmaz and Sanjani 2015). Despite the usefulness of interest rate auton- omy, the interest rate is not a universal instrument to stop the catastrophic economic cri- sis from causing undesirable disruptions in domestic economy and foreign capital market; rather, the interest rate instrument can decrease the likelihood of such an incidence and can mitigate the impact of disruptions. Nevertheless, this instrument can serve even better if it is coordinated with other monetary regulators, namely the monetary agency, the cen- tral bank institutional unit and currency board.

4. Conclusions

The paper examines the empirical validity of the interest rate autonomy in the presence of exchange rate stability strategy for 13 selected Asia Pacific countries (i.e. Australia, Canada, China, Hong Kong, Indonesia, India, Japan, South Korea, Malaysia, Philippines, Singapore, Thailand and the USA). The results obtained from the estimated open-economy Taylor rule in a standard macroeconomic model, using the GMM technique, support the hypothe- sis that the use of interest rate policy for stabilising the exchange rate helps to promote low and stable inflation, and stability of foreign capital market. Thus, the interest rate instru- ment fulfils its role as (i) as a good coordinating function to fine-tune the exchange rate misalignments for improving the macroeconomic stability and (ii) an external shock absorber to avoid or mitigate impact of instability in the foreign capital market through interest rate control on exchange rate fluctuations without neglecting the role of sterilised foreign exchange intervention. Moreover, our study confirms and extends the findings of Woo and Hirayama (1996) that monetary autonomy does not always imply interest rate autonomy in the context of coexistence with the exchange rate stability strategy.

JOURNAL OF THE ASIA PACIFIC ECONOMY 405

The current study has some limitations. First, our study relies exclusively on thirteen countries and three endogenous variables of the interest rate reaction function in a stan- dard macroeconomic model, namely the output gap, the inflation gap and the real exchange rate gap. Future research in this area would thus include other potential relevant variables (e.g. deficit spending, energy prices, net exports and other asset prices) in the standard macroeconomic model to further extend the current analysis (Note encompass- ing a number of different variables in the interest rate reaction function would inevitably complicate this instrument). Furthermore, a procedure similar to that carried out in this study can also be replicated in other countries, regardless of whether or not the countries follow an exchange rate stability policy. Second, other uncertainty issues in the computa- tion and the design of the interest rate reaction function of specifying the measures of interest rate autonomy are left for future research.

Notes

1. Risk and uncertainty sound alike (refer to awareness of limited knowledge about current or future events) and are often used interchangeably. The dissimilarity between risk and uncer- tainty is that the former implies probabilities can be assigned to the possible outcomes, and the latter cannot be assigned (Black, Hashimzade, and Myles 2017).

2. According to the managed floating exchange rate theory proposed by Bofinger and Wollmer- shauser (2001), the central bank can use the interest rate and the sterilised foreign exchange interventions as instruments of monetary policy to fine-tune the exchange rate misalignments towards achieving the exchange rate stability.

3. The exchange rate movements can generally influence the price of imported goods and are transmitted into consumer prices.

4. Evidence can also be obtained from the International Monetary Fund (2012) and the central banks’ website.

5. The creation of the stock of foreign currency reserves is to address the matter of which a coun- try has no sufficient foreign currency reserves to defend its currency and prevent its currency depreciation from boosting inflation and/or foreign capital market instability (cf. United Nations 2002; Burger and Knedlik 2004).

6. Such intervention in each of the above-mentioned countries can also be indicated by the bidi- rectional relationship between the change in the country’s net domestic assets and the change in its net foreign assets (cf. Ouyang, Rajan, and Willett, 2008; International Financial Statistics of International Monetary Fund, CD-ROM).

7. Cf. Bofinger and Wollmershauser (2001) for a further discussion of how interest rate reacts to the exchange rate in the presence of exchange rate stability policy.

8. In line with the objective of the study, further discussion of the exchange rate stability strategy is beyond the scope of this paper and is not considered to be an explicit measure.

9. The standard Taylor rule postulates that the central bank’s interest rate should be set equal to the inflation rate plus an equilibrium real central bank’s interest rate plus a weighted average of two gaps, namely the inflation gap and the output gap (cf. Taylor 1993).

10. Cf. Hammermann (2005, 117) for a further discussion of how open-economy Taylor rule can be generalised from reaction function of alternative monetary policy strategies, namely Taylor rule and the managed floating exchange rate theory.

11. In this paper, the real exchange rate is defined as the real effective exchange rate. Appreciation represents an increase in the value of a country’s currency in terms of the currencies of its trad- ing partners and vice versa.

12. For instance, some studies attribute the inflation uncertainty to the inflation gap, i.e. the devia- tion of actual inflation from the trend (Stock and Watson 2007; Cogley, Primiceri, and Sargent

406 P.-T. GAN

2010). Indeed, the potential trend inflation or the unknowable inflation target can be measured using a Hodrick-Prescott filter (Cecchetti and Kim 2006).

13. Cf. H€ufner (2004, 42) for a further discussion of why UIP is still an important building block of many theoretical models despite the lack of empirical support.

14. In keeping with the Taylor rule convention, the weight is also known as the parameter and the adjustment factor is also known as the explanatory variable; the explanatory variable is in gap form, calculated as deviations of the actual value from the potential value.

15. Because the central bank’s primary objective is to maintain low and stable inflation, this study does not include the issue of exchange rate pass-through; a low inflationary environment tends to reduce the pressure of exchange rate changes on domestic prices (Taylor 2000; Bank for International Settlements 2009; Ghosh, Ostry, and Chamon, 2016).

16. The examples of uncertainty in the foreign capital market are an excessive increase in domestic liquidity due to national policies producing excessive inflows or outflows, and an excessive increase in demand for liquidity due to the collapse of a financial boom triggering a global liquidity crisis.

17. Evidence can also be obtained from the central banks’ website. 18. Evidence to care more about inflation than growth is available from the websites of the Federal

Reserve and The Bangko Sentral ng Pilipinas, and Labonte (2017). 19. In the foreign capital markets, foreign exchange intervention can be used to prevent rapid cap-

ital inflows that can often be followed by periods of rapid outflows.

Acknowledgments

The author would like to thank the anonymous reviewers for their helpful comments and construc- tive suggestions. The author is very grateful to the Ministry of Higher Education, Malaysia and Research Management and Innovation Centre, Sultan Idris Education University, via the scheme of FRGS under grant No. 2016-0214-106-41.

Disclosure statement

No potential conflict of interest was reported by the author.

Funding

This work was supported by Ministry of Higher Education, Malaysia and Research Management and Innovation Centre, Sultan Idris Education University [grant number 2016-0214-106-41].

Notes on contributor

Pei-Tha Gan, PhD, is an associate professor in Faculty of Management and Economics, Universiti Pendidikan Sultan Idris (Sultan Idris Education University), Malaysia. He was awarded his PhD from University of Malaya, Malaysia in 2011. He is actively involved in research where he has pub- lished articles in journals including, Computational Economics, Economic Modelling, Asian Acad- emy of Management Journal of Accounting and Finance, and International Journal of Economics and Financial Issues. He is the Editor-in-chief for Journal of Contemporary Issues and Thoughts published by Sultan Idris Education University.

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