Does Central Bank Transparency Deter the Exchange Rate Volatility? New Evidence from Asian Emerging Markets

Abstract

Exchange rate volatility has emerged as a significant challenge for Asian emerging markets since the adoption of the liberalization process. This study examines the influence of central bank transparency on exchange rate volatility using a sample of ten important Asian emerging markets. The study uses a fixed effect regression model covering the Asian financial crisis, global financial crisis, banking crisis, and taper tantrum episodes. Results show that an increase in central bank transparency has a stabilizing effect on exchange rate volatility, and this effect remains even after controlling for various internal and external factors. The uncertainty of US monetary policy increases exchange rate volatility, while US economic policy uncertainty contributes only during the global financial crisis. Interestingly, central bank transparency buffers the effects of the global financial crisis, indicating that it plays a facilitating role in maintaining financial stability. Studies that examine the role of central bank transparency in curbing exchange rate volatility, which is a crucial issue in these markets, are rare in emerging markets’ context. This research offers interesting findings by using a variety of robustness checks.

Welfare fragmented information effects: The cost-benefit analysis and Trade-offs

“…Zhang et al (2023) focused on the relationship between central bank transparency and systemic risk. They depicted a non-linear effect with a moderating role of increased central bank independence, while higher transparency levels seemed to have a stabilizing effect on exchange rate volatility in a set of Asian emerging countries (Aftab and Mehmood, 2023). The stream of literature extending Morris and Shin's framework suggested alternative information structures with their respective (potentially improved) welfare implications:…”

Does uncertainty promote exchange rate volatility? Global evidence

“…There are two standard approaches to measuring exchange rate volatility: the standard deviation approach and ARCH-based approach. The former is suitable for lowfrequency data, while the latter is suitable for high-frequency data (Aftab and Ahsan, 2023). As the current study is based on monthly frequency data, we use the latter approach and measure the volatility using a univariate generalized autoregressive conditional heteroskedasticity (GARCH) (1,1) model:…”

Financial Fragility in Developing Countries: An Analysis in the Context of Monetary Policy and Central Bank Independence1

“…Introduction 1 With the globalization process, there has been an increase in the commercial, financial and other economic relations of countries with each other, and capital flows accelerated with the liberalization of capital movements. With the accel-eration of capital flows, access to financial markets has become easier, without the need for any intermediary person or institution.…”