Abstract
This article examines interest rate-exchange rate interaction using dynamic conditional correlation (DCC) analysis, a multivariate GARCH method. Weekly Philippine data from 1988 to 2000 are used in the study. The results show that the correlation between these variables is far from constant. Structural changes in the correlation structure are largely seen to be the effects of policies or policy responses to exogenous events. The shift in the direction of correlation, observed after the liberalization of the capital markets in 1993, is shown as evidence. Strong positive correlations observed during the two crisis episodes covered by the study present evidence of ineffective interest rate defense of the currency.
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