Asia Economics Blog

In theory, an exogenous increase in the policy interest rate should lead to a decline in inflation, assuming the demand side effects dominate the supply side effects. However, for emerging market economies many empirical studies based on structural vector autoregressions (SVARs) find that an increase in the policy rate is followed by a rise in prices, a phenomenon known as the price puzzle (e.g., Sims, 1992). One explanation for this puzzle is the misidentification of monetary policy shocks (Ramey (2016). To address this issue, some studies have incorporated proxies for inflation expectations (Sims, 1992; Ha et al., 2025).

An alternative explanation is provided in my paper presented at the ACAES session at the 2026 Allied Social Science Association Annual Meeting. Using high-frequency analysis of monetary policy shocks in Asian economies, the paper shows that positive shocks lead to a depreciation of the exchange rate. The price puzzle arises from this depreciation and the associated exchange rate pass-through to domestic prices. Once this indirect channel is accounted for, the price puzzle disappears, and monetary tightening is seen to achieve the intended lower inflation in the medium term.

Co-authors:  Dora Xia and Hongyi Chen
 
Evaluating the stance of monetary policy for the open economies of East Asia requires a different approach than that developed for the US. In recent years, the discussion has centered around the concept of the neutral real interest rate, or r*. A commonly used definition of r* is the interest rate that prevails when economic slack is zero and inflation is stable. Observers then ask, by comparing r* with the existing policy rate, whether current monetary conditions are too accommodative or too restrictive.

The neutral rate of interest is inherently unobservable as it is a hypothetical concept. Consequently, it must be inferred through estimation. The semi-structural models designed to estimate r* for the US do not adequately capture the macroeconomic dynamics of East Asian economies. In particular, exchange rates and capital flows play a more significant role in East Asia, with spillovers from the US factoring in. Moreover, since the Great Financial Crisis of 2008-09, central banks have expanded their purview beyond the business cycle to give more attention to financial stability.

Against the blow of the pandemic, governments worldwide undertook expansionary monetary and fiscal policies. But by 2022, pressure was on to retrench as inflation reared up and government debt-to-GDP ratios mounted.

This post continues a series that applies the framework developed in Macroeconomics for Emerging East Asia (Cambridge University Press, 2022; RePEc) to analyzing monetary and fiscal policy. The series began with a trilogy of posts on the pandemic shock of 2020 and associated fiscal and monetary policy responses. There followed a post for 2021 in which the pandemic continued to figure as the main challenge to macro stability. This post for 2022 finds the pandemic subsiding with attention turning to the disruptive spillover of US monetary tightening and the need to re-establish fiscal sustainability.

Co-author:  Jose Adlai M. Tancangco
 
The Regional Comprehensive Economic Partnership (RCEP) was established in 2020, with effect in 2022, for the purpose of deepening regional economic integration among members of the Association of Southeast Asian Nations (ASEAN) and the association's free trade agreement partners (ASEAN.org). RCEP comprises 15 Asia-Pacific economies: Brunei (BRN), Cambodia (KHM), Indonesia (IDN), Laos (LAO), Malaysia (MYS), Myanmar (MMR), the Philippines (PHL), Singapore (SGP), Thailand (THA), Vietnam (VNM), Australia (AUS), China (CHN), Japan (JPN), Korea (KOR), and New Zealand (NZL). The world’s largest trading bloc, RCEP accounted for 11.9 percent of goods exports and 5.5 percent of services exports globally in 2021.

All good intentions notwithstanding, agreements to reduce trade barriers and harmonize regulation can go only so far in achieving economic integration as long as disparate monetary and exchange rate policies among members continue to generate uncertainty and impose costs on doing business. Advancing to a higher stage of integration would require binding economies together under a currency union. Short of that, fluctuations in exchange rates and interest rates cause perpetual disturbances to cross-border trade and capital flows with inhibiting effects on engagement.

In May 2013, Ben Bernanke, Chairman of the US Federal Reserve Bank, hinted at the possibility of the Fed reducing (“tapering”) its purchases of government bonds sooner than previously expected, leading to a reassessment of the likely path of US monetary tightening. Market turbulence and economic volatility in emerging market countries (EMs), including those in Asia, quickly followed. Capital inflows turned to outflows, leading interest rates to rise, asset prices to decline and—despite a run-down of foreign reserves—exchange rates to depreciate. This event came to be known as the Taper Tantrum.

Asia's response to the pandemic has rested largely on fiscal policy with monetary policy playing a facilitating role to varying degree. Fiscal policy is the subject of the second post in this series. The first post looks at factors influencing the impact of the pandemic on GDP growth, specifically, infection incidence, mobility loss due to transmission mitigation measures, and export decline.

When:  27 October 2021, 10:00am Manila time (GMT+8)

Speaker:  Diwa Guinigundo, former Deputy Governor, Philippine Central Bank

When:  13-14 July 2021, Philippine time (GMT+8)

Sponsor:  Central Bank of the Philippines

With the August 28 announcement by Prime Minister Abe of his intention to step down from his position within weeks, his record in a number of areas will inevitably face scrutiny and evaluation. Here, I lay out, in brief, my views on his government’s macroeconomic policies, which quickly became known as Abenomics. Like most governments, his had both successes and missed opportunities. But Japan clearly has changed as a result of his economic policies. And the debate around Abenomics anticipated issues that remain highly relevant in the current global policy debate.

The context

When:  6 August 2020, 12:30-6:45pm Tokyo time (GMT+9)

Sponsors: Asian Development Bank Institute; Central Bank of Sri Lanka; Asia-Pacific Applied Economics Association