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Contents Introduction

This paper investigates whether the choice of exchange rate regimes influences the sensitivity of domestic interest rates to U.S interest rates in the East Asian countries. We employ a regime-switching model that allows for the possibility of a structural break in the extent of monetary autonomy at an unknown time and the endogeneity of U.S. interest rate shocks. We find that the sensitivity of local to U.S interest rates has declined in Korea and Thailand after they adopted floating exchange rate regimes. We also find that Japan with a floating exchange rate regime has greater independence in monetary policy than a pegged economy like Hong Kong throughout the period since 1987. These empirical findings suggest that exchange rate flexibility provides a larger extent of monetary independence.