The Differences in Spillover Effects of International Monetary Policy on Southeast Asian Economies

The aim of this study is analyzing the spillovers of monetary policies from three nations including the US, Japan, and China to the Southeast Asian economies through macroeconomic linkages. By using BVAR model, the research results present distinct responses of economic growth, interest rate and inflation index in Southeast Asia to external shocks of interest rate according to specific characteristics. In particular, nations adopting pegged regime have stronger responses to the changing of the Fed rate and Japanese monetary policy while the opposite trend is found in volatility of Chinese interest rate. However, nations with higher trade openness might have more sensitive reaction to monetary policy of all three countries. On the other hand, the impact of international monetary policies on Southeast Asian countries is explained quite different between the group having higher capital openness and the other one. In general, the results are consistent with many previous studies as well as Mundell-Fleming’s impossibility triple theory. JEL Classification: E52, F42, N10, O11. Plain language summary Purpose: This study analyzes the spillover effects of monetary policies from three nations including the US, Japan, and China to the Southeast Asian economies through macroeconomic linkages. Methods: By using the BVAR approach proposed by Doan et al. and Litterman, the study analyzes the spillovers effects of monetary policy from three nations to Southeast Asian countries. Conclusions: The nations in Southeast Asia adopting pegged regime have stronger responses to the changing of the Fed rate and Japanese monetary policy while the opposite trend is found in volatility of Chinese interest rate. However, nations with higher trade openness might have more sensitive reaction to monetary policy of all three countries. The results are consistent with many previous studies as well as Mundell-Fleming’s impossibility triple theory. Implications: The size of spillovers varies in every country, depending on factors such as the exchange rate system and the degree of financial integration. Limitations: The number of Southeast Asian countries analyzed is only 6 and the study period was limited to the period from 2009 to 2019 so that the suggested policy implications are only appropriate for this scope.