4 Data and Results
4.2 Impulse Responses Analysis
Figure 1 to Figure 3 show the impulse responses to contractionary monetary policy shocks and exchange rate depreciation shocks for Thailand, Malaysia and South Korea, respectively, using the pure-sign restrictions approach. Shocks are normalized to the magnitude of one standard deviation in size. For contrac- tionary monetary policy shocks, the responses of the consumer price inflation, real GDP and real exchange rates are restricted not to be positive and the re- sponses of interest rates are restricted not to be negative for six months. For exchange rate depreciation shocks, the responses of the consumer price infla- tion, real GDP, interest rates and the real exchange rates are restricted not to be negative for six months. The solid line is the median of the posterior distri- bution and the dashed lines represent the 16 percent and 84 percent quantiles of the posterior distribution of impulse responses, corresponding to one standard
deviation under the assumption of normality.
For Thailand, the figure indicates that the monetary policy effect on real stock prices has a marginally significant impact over the long run. This is strongly persistent. A one standard deviation contractionary monetary policy shock - roughly equal to a ten basis points increase in interest rates - results in a decrease of market index real stock prices.14 This is statistically significant
a month following the shocks. The course reversal is found at around twenty- five months. For exchange rate depreciation shocks, the results seem to prove that they are statistically significant and positive only in the first four months immediately following the shocks, before reversing the course.15 For Malaysia,
while real equity prices show a statistically significantly negative response to real exchange rate shocks over the short run, we are unconfident in concluding that contractionary monetary policy shocks have a significant effect on the mar- ket index real stock prices.16 Nevertheless, it is indicative that contractionary monetary policy shocks tend to result in a fall in real equity prices. In addi- tion, we observe that falling market index real stock prices reverse the course in around five months. Interestingly, this corresponds to the course reversal of
14We observe Dornbusch’s (1976) well-known exchange rate overshooting hypothesis stating that an increase in the interest rates should cause the exchange rates to appreciate instanta- neously, then to depreciate in line with the uncovered interest parity (UIP) condition.
15In the section pertaining to robustness, using horizons for the sign restrictions to be imposed (k) equal to eight, we can conclude more confidently that exchange rate depreciation shocks have a statistically significant effect on the market index real stock prices over the short run, for Thailand.
16According to the results reported in the Robustness section usingk= 8, we can conclude more confidently that contractionary monetary policy shocks have a statistically significant effect on the market index real stock prices for Malaysia.
real exchange rates from depreciation to appreciation. For South Korea, both contractionary monetary policy shocks and exchange rate depreciation shocks have a statistically significantly negative effect on the stock market. Similar to the results for Malaysia, exchange rate shocks have a marginally significant impact over the short run and course reversal is observed in around ten months. Monetary policy shocks result in a strongly persistent effect on market index real stock prices from the fourth month to the forty-third month (forty months). We note that, for Thailand, our results are consistent with those of Granger et al. (2000). That is, in agreement with the traditional approach, exchange rates lead stock prices with positive correlation. For Malaysia and South Korea, the statistically significantly negative responses of real stock prices to exchange rate depreciation shocks might be attributed to the assembly industry in their countries. This needs to be explored by further research.
For all the countries examined, impulsed by both contractionary monetary policy shocks and by exchange rate depreciation shocks, financial sector index real stock prices react similarly to market index real stock prices, but with a greater magnitude.17 To show this, we observe from the results for Thailand that, immediately following contractionary monetary policy shocks, the lowest point (-6 percent) of the financial sector is lower than that of the market (-4 percent). In addition, serving as one of our main findings, the figures indicate that contractionary monetary policy shocks result in a strongly persistent effect
17See, for example, Chamberlainet al. (1997) for the sensitivity of banking stock returns to movements of exchange rates.
on market index real stock prices, in an average of 37.5 months. Having a marginally significant impact only over the short run, the impact of exchange rate depreciation shocks is short-lived, with an average of 7 months. Those results are summarized in Table 2.
For the real GDP, it is worth mentioning that our results acquired are con- sistent with those of existing literature. That is, aggregate demand shocks have real effects and, empirically, contrationary monetary policy shocks lead to a persistent decline in that variable. See Christiano et al. (1996).