Working Paper Series,
Stockholm School of Economics, China Economic Research Center

Abstract: We use structural VAR models with short-run restrictions to analyze the potential transmission of China’s monetary policy shocks to equity markets in Southeast Asia. Our results show that several of the markets in the region are influenced by China’s monetary policy, even though the effect is modest. The impact of a monetary expansion in China is significant and positive for four of the five Southeast Asian equity markets, indicating an increase in demand for goods and services in both China and abroad, which in turn shows up in the foreign equity market. The results provide evidence of China’s growing influence in Southeast Asia and its financial markets. The transmission effect is still quite small, but can be expected to increase if the current trends of deepening economic integration between China and Southeast Asia and a maturing Chinese central bank continue.

Keywords: Monetary policy; stock market; structural vector autoregressive model; monetary transmission; China; Southeast Asia

JEL-codes: C32; E44; E52; F42; G10

33 pages, May 1, 2010

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