EXCHANGE RATE AND INTEREST RATE IN THAILAND: A LOOK AT TRADITIONAL AND REVISIONIST VIEWS

In this paper, we analyze the traditional-revisionist debate on whether high interest rate can defend the downfall in currency values by allowing for asymmetric responses of exchange rate to positive and negative changes in the interest rate using Thailand data. Applying an EGARCH specification with long span of data, we find evidence in support of the revisionist view. Namely, while the decline in the interest rate may lead to currency depreciation, we find no evidence that high interest rate appreciates the currency. Instead, albeit small in magnitude, high interest rate tends to lead to further depreciation. Thus, the policy of high interest rate to defend the currency can be futile and costly.