Thursday 10 July 2008

The Impact of Chinese Monetary Policy Shocks on East Asia

A recent working paper from the Bank of Finland (who write a surprisingly large amount of papers on China for a northern European central bank) looking at the impact of Chinese monetary policy on the rest of Asia.

The conclusions are unsurprising I am not not a fan of SVAR models myself but it might interest some.

The Impact of Chinese Monetary Policy Shocks on East Asia [SSRN]

TOMASZ J. KOZLUK
Organisation for Economic Co-operation and Development
AARON N. MEHROTRA
Bank of Finland - Institute for Economies in Transition (BOFIT); European University Institute - Economics Department (ECO) April 25, 2008

BOFIT Discussion Paper No. 5/2008

Abstract:
We study the effects of Chinese monetary policy shocks on China's major trading partners in East Asia by estimating structural vector autoregressive (SVAR) models for six economies in the region. We find that a monetary expansion in Mainland China leads to an increase in real GDP (temporary) and the price level (permanent) in a number of economies in our sample, most notably in Hong Kong and the Philippines. The impact could result from intertemporal substitution present in a general equilibrium framework which allows for positive domestic impacts of foreign monetary expansions. Our results emphasize the growing importance of China for its neighboring economies and the significance of Chinese shocks for the design of monetary policy in Asian economies.


Keywords: monetary policy shocks, Asian production chain, SVAR, East Asia, China

JEL Classifications: E52, F42

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