The Impacts of Financial Integration on the Linkages Between Monetary Independence and Foreign Exchange Reserves


Tee, Chee Lip and Law, Chee Hong and Lau, Wei Theng (2019) The Impacts of Financial Integration on the Linkages Between Monetary Independence and Foreign Exchange Reserves. International Economic Journal. pp. 212-235. ISSN 1016-8737

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This paper investigates the short-run and long-run effects of financial integration on the dynamics between monetary independence and foreign exchange reserves using a GMM system estimation involving two-year non-overlapping average data (2000-2011) from 114 countries. The results indicate that the effect of foreign exchange reserves on the monetary independence is intensified by the level of financial integration. This suggests a positive spill over effect from the financial integration to the monetary policy independence. Besides, a positive implication of financial integration on monetary independence could be established when the foreign exchange reserves is at the maximum level. In addition, the comparisons between the mean of foreign exchange reserves and the threshold levels of foreign exchange reserves that neutralise the impact of financial integration indicate that on average, the foreign exchange reserves are sufficient to offset the effect of financial integration. A stable exchange rate will undermine the positive impact of foreign exchange reserves on monetary independence. Finally, the long-run and short-run impacts occur in the same direction. This paper ends with some policy implications and suggestions for future research.

Item Type: Article
Uncontrolled Keywords: Monetary independence, foreign exchange reserves, financial integration, system GMM, interaction term
Subjects: H Social Sciences > HG Finance > HG3810-4000 Foreign exchange. International finance. International monetary system
Divisions: Faculty of Management (FOM)
Depositing User: Ms Suzilawati Abu Samah
Date Deposited: 15 Feb 2022 03:27
Last Modified: 15 Feb 2022 03:27


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