Interdependence between monetary policy and asset prices in ASEAN-5 countries

In this paper, we investigate the interdependence between monetary policy and asset prices in ASEAN-5 countries. Within country-specific models and proxying asset prices by the composite stock market indices of these countries, we find strong interdependence between monetary policy and asset prices. We show that real stock prices decline as interest rates increase due to a contractionary monetary policy shock. Interest rates rise in response to an increase in real stock prices induced by a real stock price shock, although it does so a couple of months after the shock. We find the interdependence of monetary policy and asset prices to hold up within panel models. The delay in interest rate response to real stock price shocks originates from three of the ASEAN-5 countries, namely Indonesia, the Philippines, and Thailand.