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In light of this, the author decides to write on "Spillover effects of the US monetary policy on the markets of ASEAN countries." scope for the expanding ASEAN countries market from 1st

HO CHI MINH UNIVERSITY OF BANKING

SUMMARY OF DOCTORAL DISSERTATION

MAJOR: FINANCE - BANKING

Code: 9.34.02.01

SPILLOVER EFFECTS OF THE US MONETARY POLICY ON

THE MARKETS OF ASEAN COUNTRIES

Ph.D Student : Nguyen Van Dan

Academic title and full names of supervisors:

1 Dr Le Van Hai

2 Dr Ton That Vien

HO CHI MINH CITY - 2022

CHAPTER I: INTRODUCTION 1.1 RATIONALE FOR THE STUDY

The spread of market turbulence from one nation to another is referred to as the spillover effect (Abou-Zaid, 2011) Governments and monetary agencies all around the world now face difficulties as a result of this Fiscal, quasi-fiscal, and particularly monetary policies, when implemented in one nation, can easily have a domino impact (spill effects) on the rest of the world The number and complexity of shock transmission routes have both risen

There have been numerous studies analyzing the monetary policy's spillover effect from established markets to other markets, but none have examined this phenomena for the market segment of emerging countries development, Vietnam included Instability on a global scale, according

to Park (2013), might pose a serious threat to the development and future

of Asian nations In particular, Southeast Asian nations and the United States, which dominates trade and investment, have tight economic relations In order to create appropriate policies, Kawai (2015) highlights that policymaker in these nations need to have a thorough understanding

of spillovers Additionally, there are constraints in the general data analysis for the emerging market that include rich and developing countries in the same sample, such as the significant disparities in income imports and policy features between nations The factors that go into the analysis of spillovers are also very different because most studies only consider factors like interest rates, inflation, output, exchange rates, and asset prices, which only causes a small number of spillovers and does not fully take into account all of the different ways that spillovers can affect both the real economy and financial markets Furthermore, the transmission mechanism of the monetary policy spillover effect through various channels has not been particularly highlighted in many studies

The success of a country's economic development is increasingly influenced by US monetary policy, which also has an impact on regional and global financial markets Any modification to US monetary policy has a cascading effect that affects the discount rate, exchange rate, trade, and investment policies, influencing the overall economic climate macroeconomics As a result, it is crucial to examine the swings in the market as well as the macro risks that the real economy and ASEAN's developing nations face as a result of the effects of the US monetary policy shock Above all, since the research findings are based on scientific underpinnings that are applicable to both practice and reality, it

is crucial to comprehend how the US monetary policy affects these economies It is crucial to assist in the analysis, evaluation, and planning

of managers' policies as a theoretical foundation The study also suggests

a fresh framework for analysis as a guide for future work in this area The analysis has made the author aware of the necessity for more research on the topic of the spillover effect of foreign monetary policy in order to resolve pertinent issues In light of this, the author decides to write on

"Spillover effects of the US monetary policy on the markets of ASEAN

countries." scope for the expanding ASEAN countries market from 1st

quarter, 2008 – 4th quarter/2019

1.2 AIMS OF STUDY

This study is aim to construct models to investigate the effects of

US monetary policy on ASEAN's developing-nation markets In order to reduce the detrimental effects of US monetary policy on the markets of these nations, the analysis makes a number of policy recommendations based on this information

1.3 RESEARCH QUESTIONS

The thesis responds to the following research questions in order to achieve the research goals:

1 What are the characteristics of the US monetary policy and the economic ties between the US and ASEAN countries throughout the research period?

2 Is the US monetary policy's impact on the financial market and actual economy of ASEAN nations statistically significant or not?

3 What are the size and direction of the US monetary policy's indirect effects on the financial market and actual economies of ASEAN nations?

4 What are the possible policy repercussions to reduce the adverse impacts of the US monetary policy spill on the ASEAN market?

1.4 SUBJECT AND SCOPE OF THE STUDY

Subject of the study: The study focuses on the relationship between

the factors that represent US monetary policy and the factors that are associated with the real economy of ASEAN countries

Scope of the study: The research topic is based on sample data

collected on the United States and ASEAN developing countries, namely Indonesia, Malaysia, Philippines, Thailand and Vietnam The research content of the thesis only focuses on the aspects of financial market and the factors of the real economy of ASEAN countries from 1st quarter,

2008 – 4th quarter/2019

1.5 METHODS

In this study, the author uses a combination of qualitative and quantitative research methods to find suitable answers to the research questions of the thesis, specifically:

Qualitative research method: Methods of systematization,

generalization and synthesis to carry out research overview to establish the theoretical basis of the thesis Comparative, analytical and inductive methods are used to interpret and draw conclusions about the research object; finally, interpolation and extrapolation methods are used to make

recommendations and policy implications for policy makers in ASEAN countries

Quantitative research method: It is carried out through building a

quantitative model to evaluate and measure the spillover effects from the

US monetary policy on the financial market and the real economy of ASEAN(5) countries Research using E-view software to process data; The testing of hypotheses is based on the VAR estimation technique

1.6 CONTRIBUTIONS OF THE THESIS

Scientific significance: Most of these studies have not analyzed the

spillover effects through the mechanism leading to the spillover effect of different channels There are very few studies disaggregated by channels,

so the factors in the analysis of international monetary policy spillover effects of previous studies are not really complete and cover all aspects that need to be considered Therefore, the author's testing of spillover effects from US monetary policy to ASEAN countries with a fuller number of impact channels including 5 channels will help provide empirical evidence and have more in-depth assessment of the international monetary policy spillover effect In which, in addition to channels such as exchange rate channel, financial channel and aggregate demand channel, the author's analysis of monetary policy spillover effect through the addition of two channels is portfolio balance channel and financial growth channel may contribute an additional research dimension to existing studies

Most of the studies mainly focus on analyzing spillover effects from monetary policy of developed countries and regions to emerging markets, however, no studies have been conducted to test specifically for the group of countries developing countries in ASEAN, including Vietnam Therefore, the topic will add more empirical evidence on the spillover effect of international monetary policy to the countries in the

above group in the period 2008 - 2019 Along with that, separating Vietnam into a bloc will helps to have a deeper insight into the relationship between the Vietnamese market and the world market The thesis has summarized and analyzed the theoretical basis for measuring the factors of the international monetary policy spillover effect The author presents in detail the definition and measurement methods At the same time, the topic systematizes and analyzes the development of background theories as well as summarizes the important experimental research results of authors in the world and in Vietnam Therefore, the study will become a suitable reference for those interested

in the spillover effects of international monetary policy

Practical significance: The research results on spillover effects

from the US monetary policy on the markets of ASEAN countries will fill the gap in the scientific basis Help policymakers understand more deeply about the spillover from US monetary policy to their country's economy to establish appropriate solutions and policies to promote market integration and development financial as well as the economy of each country In addition, investors as well as international administrators can also refer to the results as a source of information to support decisions when investing, connecting trade with the markets of ASEAN countries

1.7 ORGANIZATION OF THE THESIS

In addition to the introduction, conclusion, list of published works, list of references, appendices, the thesis includes 5 chapters :

Chapter 1: Introduction

Chapter 2: Literature Review

Chapter 3: Research Methodology

Chapter 4: Results and discussion

Chapter 5: Conclusion and implications

CHAPTER 2: LITERATURE REVIEW 2.1 DEFINITIONS

2.1.1 Monetary policy anh the spillover effect of monetary policy

The term "spillover effect" refers to how market swings move from

one nation to another (Abou-Zaid, 2011)

According to Dornbusch and Claessens (2000), spillover refers to the spread of market fluctuations from one country to another, a process observed through declines in stock prices, exchange rates or capital flows Numerous studies on the monetary policy spillover effect have been conducted up to this point Because the real economy is included as well as elements related to the financial sector in the analysis and evaluation of the spillover impact The concept of the "spill effect" of monetary policy, which is the impact of one country's monetary policy on macroeconomic variables in other nations including output, inflation, interest rates, exchange rates, stock prices, etc., is used in the thesis as a result

The general idea of international monetary policy spillovers began with the pioneering works of Mundell (1963) and Fleming (1962), and was later extended by Dornbusch (1976), showing the different channels through which externalities can be transmitted from one country to another The two basic predictions of the Mundell-Fleming-Dornbusch

models are the Expenditure-shifting effect and the Expenditure-increasing effect as channels of international monetary policy spillovers The first

argument states that a country's monetary easing leads to a devaluation of the exchange rate, which leads to an improvement in the balance of trade and an increase in domestic output at the same time have the opposite effect for partner countries The second argument posits that the same monetary easing would increase domestic demand (through consumption and investment spending), increase domestic imports (which are the

country's exports to the country partners), causing the domestic trade balance of the host country to deteriorate and will have the opposite effect on the partner countries

2.1.2 Related theories of monetary policy spillover effect

2.1.2.1 Mundell - Fleming model

The supply of imports is completely elastic at a given price in foreign currency, and the supply of domestic output is perfectly elastic at

a given nominal price in a small country that is subject to particular global interest rates Expanding monetary policy's effects causes a decline

in exchange rates, a rise in domestic demand for goods and income, a fall

in interest rates and capital outflows, and a trade surplus

2.1.2.2 Model of exchange rate reactions to interest rate changes

There may be a difference between domestic and international interest rates; Foreign and domestic securities can be used interchangeably; the degree to which currency expansion results in a decline in the spot rate in comparison to the anticipated rate; The elasticity of expectation is less than 1 in the short term and equal to 1 in the long run Impact of monetary policy that is expansionary: The declining spot rate raises the anticipated deposit in the short term while decreasing the domestic interest rate over the long run restrict the impact

of exchange rate fluctuations on interest rates; The influence on the run trade balance of a decline in the spot exchange rate on domestic output depends on the elasticity of expectations

short-2.1.2.3 Model of exchange rate expectations and total spending

The full weighing of the trade impact provisions on the revenue absorbed by the offset decrease in saving; The fact that trade flows only respond to fixed rates; The reason for the short-term effect, as opposed to the long-term effect, is that the indicator models have been fully adjusted

to changing trade terms Expanding monetary policy's effects reductions

in spot rates, capital outflows, and interest rates based on specific incomes; The elasticity of expectations will have a significant impact on how the expansion of monetary policy affects the short-term trade balance

2.1.2.4 The theory of interest rate parity (IRP)

Interest rate parity (IRP) is the equilibrium that results when market forces cause interest rates and exchange rates to vary, rendering hedged arbitrage ineffective The difference in interest rates between the two countries exactly balances out the difference between the forward rate and the spot rate between the two currencies in this equilibrium Ngoc Tran Tho (2005)

Domestic and overseas interest rates are distinct from each other Two classes of constitutive factors are to blame for the situation (1) National characteristics, or national premiums; and (2) monetary characteristics, or currency risk premiums Ocampo et al (2009) assert that capital flows halt when interest rate parity, or when the domestic return equals the external rate of return, happens In theory, capital will

be moved to the location with a greater return if there is ever a shift in the domestic return and the external return out of phase

2.1.2.5 The International Fisher Effect

According to the international Fisher effect theory, when foreign interest rates are lower than domestic interest rates, foreign currencies will increase By increasing foreign returns for domestic investors, this appreciation will bring foreign returns closer to those of domestic assets When the international interest rate is higher than the domestic interest rate, on the other hand, the value of the foreign currency will decrease From the perspective of domestic investors, this drop will lower the return on foreign securities, resulting in the return on international securities being equal to the return on domestic securities (Tran Ngoc Tho, 2015)

2.1.3 Channels for monetary policy's spillover effects

2.1.3.1 Exchange Rate channel

The domestic interest rate in the host nation will be lower than the foreign interest rate when monetary policy is loosened, and the value of the home currency will also decline This will improve the nation's trade balance (balance between imports and exports) and thus raise national output Additionally, the aforementioned move will have an impact on the output and trade balance of this country's trading partners (Ammer et al., 2016)

2.1.3.2 Financial channel

According to Punzi et al (2017), unconventional policies can influence asset prices by boosting investor confidence and increasing risk appetite (relaxing monetary policy in closed developed economies role in promoting risk-averse investors to invest more in Asian equity and bond markets) When monetary policy is eased, it reduces long-term yields and increases other asset prices in the host country, increasing asset prices in foreign economies (Ammer et al., 2016)

2.1.3.3 Aggregate demand channel

When monetary policy is relaxed, this raises domestic demand (via spending on consumption and investment in the host country), which raises the imports of the host country and thus raises the host country's import value (Ammer et al., 2016)

2.1.3.4 Portfolio rebalancing channel

Quantitative easing entails the purchase of long-term assets, typically long-term government bonds and mortgage-backed securities, according to Lavigne et al (2014) and Fratzscher et al (2013) Due to investors' shift to riskier assets in search of higher risk-adjusted returns, there is a consequent decrease in the availability of such assets to private

investors and a rise in demand for alternative assets, especially those from emerging markets Capital flows into Asia and the Thai Binh Duong region are significantly influenced by global liquidity and portfolio rebalancing (Punzi et al 2017)

2.1.3.5 Financial growth channel

The US dollar depreciates against the national currencies of partner nations as a result of a supporting monetary policy in the US The accumulation of foreign currency debt by households and corporate sectors can be advantageous As a result, credit is increasingly sought for (Punzi et al., 2017) This effect results from a temporary decline in the value of foreign currency debt in local currency, which can increase credit demand and borrower credit value and, in turn, encourage banks to

extend credit

2.1.3.6 Signaling channel

A theoretical easing strategy injects liquidity into the market, according to Chen et al (2012) The risk-neutral component of bond yields can then be decreased by sticking to the promise to keep the Fed rate around zero (or future policy rates lower than anticipated) Because

of persistently low U.S interest rates and abundant market liquidity, the triggers should in turn encourage trade and capital flows to emerging countries quickly make investments in riskier assets (Borio & Zhu, 2008)

2.2 PREVIOUS STUDIES

2.2.1 In the word

First of all, Apostolou et all (2013) argued that the spread of the FED's monetary policy can explain some fluctuations in most market factors Finance includes: Exchange rates of emerging countries with the dollar, stock market income and bond interest difference In contrast, the study found very limited evidence of the spread of FED's policy fluctuations on the real economy (industrial production) of these

countries; Regarding the fluctuations of inflation in EME, the study did not find any evidence that affects this According to Bhattarai & Chatterjee (2015), the QE shock of the United States has led to an increase in production and consumer prices in the United States, the yield

of long - term treasury bonds decreased, exchange rate The measurement decreases while the stock price increases Has a significant impact on financial variables in emerging market economies It leads to an increase

in exchange rate, reducing long - term bond yields, the explosion of the stock market and the increase in capital flows into these countries However, the study did not find a significant impact of the US QE shock for production and consumer prices

Similarly, in another research, Punzi & Chantapacdepong (2017) showed that, after the crisis period, the exchange rate of these countries had a sharp decline Meanwhile, the US monetary policy has not significantly affected the exchange rate before the crisis Interest rates in Asia and Pacific react in the same direction as the US interest rate increase, the reaction of the exchange rate also reflects a sudden increase

in capital flows to Asia and Thai Binh Positive Securities prices in these countries react against the US monetary policy interest rate Rohit & Dash (2018), the research results show that the monetary policy in economies with stable exchange rates is easily affected by a series of impacts from foreign countries, especially policies that occur out in central economies However, countries with flexible exchange rate regime have helped support the overflow effects from monetary policy actions of central countries Iacoviello & Navarro (2018), the research results show that, when the United States implemented a tight monetary policy, the output in partner countries was reduced Ganelli and Tawk (2016), studying the overflow effect of Japanese monetary policy to emerging countries in Asia The research results show that the domestic impact of Japan has caused a boom of stock prices, increased production,

and the yen devalued, but with impacts on inflation Bank credit is almost unchanged, the strongest short -term impact is about capital flows The research results also show that the reaction of the output of emerging Asian countries with the overflow effect from Japanese monetary policy

is positive However, the impact of Japanese monetary policy on the exchange rate is negative when increasing the price of the local currency compared to the Japanese yen in the partner countries, the reaction of inflation of research countries Save is also very limited with the Japanese QQE shock

The results of the study also pointed out that the homogeneous reaction of each country to the bank credit and the impact tend to have no statistical significance The reaction of the capital flows of Asian emerging countries is also small and uniform Dekle (2017) stated that in the short term, Japanese monetary policy has a strong impact on GDP of Korea, China and Thailand In the middle and long term, the expansion of Japanese facilities has a positive impact on Thailand's GDP, does not affect China and a slightly negative effect on Korean GDP The reaction

of inflation in these countries with Japan's monetary policy is negligible, while the stock price reacts strongly to the Japanese expansion monetary policy, especially the Korean and Thailand markets The research results also show that the currencies of all countries increased compared to the Japanese Yen during the reality of China, and to a lower extent than Korea and Thailand both fixed their currency with the US dollar

When studying the spread of the US monetary policy for emerging economies, Gupta & ctg (2017) agreed that the surprises about the US monetary policy have a significant impact on emerging economies such

as exchange rates, stock prices and bond profits Specifically, the unexpected monetary tightening, estimated by increasing the yield of 2 -year treasury bonds, leading to reduced exchange rates, reduced stock

prices and increased bond income in new economies floating On the other hand, an unexpected relaxation has the opposite effect that increases the exchange rate, increases stock prices and reduces bond yields in emerging economies

According to Ammer & ctg (2016), when US policy actions reduce the 25 -point treasury bonds, the price of the LA gauge decreased by 1% The decline of the US dollar increases the US exports to 0.7%, reducing the US imports by 0.4% and eventually increasing the actual net export of about 0.15 percent compared to GDP of its GDP USA This caused the actual foreign export of foreign countries to decrease, pushing foreign GDP to about 0.05%, a relatively small impact Based on previous studies

on the impact of monetary policy, the author assumes the interest rate of

10 -year treasury bonds decreased by 25 points to increase the demand of the United States by 0.5%; The expansion of the US demand is likely to increase the country's import to about 1% or 0.15% of GDP and promote foreign GDP increase by 0.05% The results also showed that a FED policy announcement led to a reduction of 25 points in US yields related

to a reduction of 12 points in German yields

2.2.2 In Vietnam

When studying the currency reaction of Asia and Vietnam with the overflow impact from Chinese monetary policy, which analyzed the difference of economic characteristics, Pham Thi Tuyet Trinh & ctg (2019) argued that Vietnam's monetary policy has reacted in the same direction as China's spillover effects while the Asian monetary policy does not react According to Huynh Cong Danh (2016), the impact of non -traditional monetary policy from developed countries to developing countries and proposed some policy suggestions for Vietnam The research does not use quantitative methods with the selection of elements

to put into the model, instead the author selects analytical and interpreted

method to draw lessons for Vietnam Nguyen Duy Sưu (2017) conducted

a study to investigate monetary policy transmission in Vietnam Whereas the objective of this thesis is to test the spillover effect from the international monetary policy

2.3 RESEARCH GAP

By reviewing the literatures and experimental studies related to Spillover effects, the author found that the topic of this research still exists certain gaps that can explore further

First of all, a lot of study has been done on the spillover effects of

foreign monetary policy, including studies on the United States and other nations However, no separate studies on the effectiveness of policy spillover to developing nations, specifically from the United States to the developing countries of ASEAN, including Vietnam, have been conducted

Secondly, In order to more clearly illustrate the similarities and

differences between Vietnam and these countries, the topic will also compare Vietnam to the other countries in the group on its own

Thirdly, study is needed to further evaluate the transmission

mechanism of the global monetary policy overflow effect, which has only received a small amount of prior research

Finally, study will provide two additional channels, the balanced

channel of the portfolio and the financial growth channel, through examination of other vulnerabilities, in addition to channels like exchange rate channels, financial channels, and overall demand channels Portfolio capital flows and credit expansion in the private sector As a result, in addition to the previous studies, there is another component of

investigation

CHAPTER 3: METHODOLOGY 3.1 CONCEPTUAL FRAMEWORK AND RESEARCH MODELS

Empirical investigations, analysis of US monetary policy traits, and economic ties between the US and ASEAN countries are reviewed in Chapter 2 in order for the author to develop a model for the thesis based

on theories of monetary policy spillover effects

3.1.1 Basic model

The basic theory is the theory of the Expenditure -shifting effect and Expenditure-increasing effect of the Mundell-Fleming-Dornbusch models and inheriting the selection of variables in Research by Ammer et

al (2016), Dekle (2017), Punzi & Chantapacdepong (2017) and Pham Thi Tuyet Trinh (2019)

The United States functions as a country that plays a vital role in spreading monetary policy, ASEAN(5) countries are the receiving countries At the same time, with the desire to analyze more clearly for Vietnam as well as to compare with other ASEAN developing countries, therefore, the research separates Vietnam into a separate part

Yt =[(GDPust, CPIust, M2ust, IRust), (GDPat, CPIat, IRat), (GDPvt, CPIvt, IRvt)]

Note: us: The United State; a: ASEAN; v: Vietnam

Hypothesis (H0): Increasing output and inflation in the US coincide with

falling US Treasury yields, which also predicts increases in Vietnam and ASEAN's developing economies

3.1.2 Research model based on channels for the spillover effect 3.1.2.1 Exchange Rate channel model

Yt =[(GDPust, CPIust, TBust, M2ust, EXust, IRust), (GDPat, CPIat, IRat), (GDPvt, CPIvt, IRvt)]