Effects of FRB’s Raising Interest Rates on Regional Currencies and Regional Monetary Cooperation

This paper bases on empirical results of Ogawa and Wang (2016) to investigate impacts of US interest rate hikes on East Asian currencies and to discuss an issue on directions of regional monetary and financial cooperation. A VAR model was used to make empirical analyses of effects of increases in interest rates in the United States on interest rates and exchange rates of East Asian currencies. We have important empirical results that East Asian countries without any capital controls would face both upward pressure on their domestic interest rates and depreciation of their home currencies when the FRB raises the interest rates. Moreover, we have an interesting result that a change in interest rates in the United States gave an asymmetric effect among East Asian currencies. Higher interest rates in the United States increase interest rates in emerging East Asian countries while interest rates in Japan are kept at a lower level. The widening interest differentials stimulate speculative carry trades to appreciate the emerging East Asian currencies against the Japanese yen. We discuss a regional monetary cooperation in order to mitigate these turbulences. Given that the FRB’s raising interest rates will give the turbulences to regional currencies, the monetary authorities of the regional countries should prepare for any crisis prevention by making surveillance over movements in interest rates and exchange rates as well as sudden changes in capital flows as well as crisis managements by establishing currency swap arrangements among the regional countries.