Interactions between monetary policy and exchange rate in inflation targeting emerging countries: the case of three East Asian countries

This paper investigates empirically how the reaction of monetary policy to exchange rate has changed after the adoption of inflation targeting regime in three East Asian countries. Using a structural VAR and single equation methods, this study shows that the reactions of monetary policy to exchange rate shocks as well as CPI (demand shocks) and output (supply shocks) have declined under the inflation targeting environment. The policy function reacts weakly to the exchange rate movements before and after the financial crisis of 1997 in two out of the three countries.