Monetary Policy and International Reserves: Empirical Evidence from East Asian Countries

This paper estimates a monetary policy reaction function with international reserves as an additional variable in the five crisis‐affected East Asian countries by using an autoregressive distributed lag approach. An inclusion of international reserves in the reaction function seems to be justified on the ground that small open economies have to consider external constraint and financial stability in addition to conventional macroeconomic stability. Empirical findings suggest that monetary policy significantly reacts to the level of international reserves in these countries, particularly in the post‐crisis period, reflecting a fact that the conventional Taylor rule does not properly explain the monetary policy reaction in emerging economies.