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Abst ract Thi s paper exam i nes whet her a m onet ary pol i cy t i ght eni ng (i . e. , an i ncrease i n t he dom est i c i nt erest rat e) was successf ul i n def endi ng t he exchange rat e f rom specul at i ve pressures duri ng t he Asi an f i nanci al cri si s. W e est i m at e a bi vari at e VECM f or f our Asi an count ri es, and i m prove upon exi st i ng st udi es i n t wo i m port ant ways. Fi rst , by usi ng a l ong dat a span we are abl e t o com pare t he ef f ect s of an i nt erest rat e ri se on t he nom i nal exchange rat e duri ng t ranqui l and t urbul ent peri ods. Second, we t ake i nt o account t he endogenei t y of i nt erest rat es and i dent i f y t he syst em by expl oi t i ng t he het eroscedast i ci t y propert i es of t he rel evant t i m e seri es, as suggest ed by Sent ana and Fi orent i ni (2001). W e f i nd t hat whi l e t i ght m onet ary pol i cy hel ped t o def end t he exchange rat e duri ng t ranqui l peri ods, i t had t he opposi t e ef f ect duri ng t he Asi an cri si s.

Applied macroeconomists have tested for the government intertemporal solvency condition by either testing for linear stationarity in the total government de¢cit series or testing for linear cointegration between total government spending and total tax revenues. A number of authors have focused, in particular, on structural breaks in the government de¢cit process. In this paper, we use a smooth transition error correction model to test and estimate a shift in the adjustment toward a linear cointegration relationship between the government spending to output ratio and the total tax revenues to output ratio. Estimation results show that government authorities react only to large (in absolute value) changes in the government spending to output ratio. Residual diagnostic tests are provided and they show that the model is not misspeci¢ed. " IntroductionThe government's intertemporal solvency condition states that the discounted value of its debt tends to zero over time. Recently, researchers have attempted to test the solvency condition by taking into account the time series properties of ¢scal variables. Quintos (1995) showed that a necessary and su¤cient condition for intertemporal solvency is the requirement that b, the slope coe¤cient of an ordinary least squares (OLS) regression between tax revenues and government spending, is less than or equal to unity, regardless of the order of integration of the estimated residual. To be more speci¢c, Quintos distinguishes between a weak and a strong de¢nition of solvency. The former implies that the intertemporal solvency constraint holds, even though the level of undiscounted public debt is explosive over time, since it grows at a rate lower than the discount factor. The strong solvency condition refers to a stable undiscounted level of public debt. Assuming that tax revenues and government spending are both I(1), strong solvency occurs if there is cointegration and the slope coe¤cient b is unity. Weak solvency occurs

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We are grateful to an anonymous referee for helpful comments. We are also grateful to Bruce Hansen for helpful suggestions, and for making available his Gauss Programme to estimate and make inferences on the TAR model. The usual disclaimer applies. Terms of use: Documents in EconStor may

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We utilize a stochastic volatility model to analyse the possible effects of inflation targeting on the trade–off between output gap variability and inflation variability. We find that the adoption of inflation targets (in New Zealand, Australia, Canada, the UK, Sweden and Finland) might result in a more favourable monetary policy trade–off (except in Australia and Finland). This conclusion is reached by comparing, first, the economic performance of targeting countries in the 1980s and the 1990s; and second, the economic performance in the 1990s of targeting and non–targeting countries (the USA, Japan, Switzerland, Germany, France and the Netherlands). We focus on two possible explanations for the performance of the inflation–targeting regime: the relatively high degree of monetary policy transparency, and the presence of a flexible institutional framework