Transmission of Shocks from Japan to Southeast Asia: Can Open-Economy New Keynesian Model Account for the Facts?

This paper documents that for Southeast Asia (1) Japan’s favorable output shock and monetary olicy tightening prosper thy neighbors and is welfare-enhancing; (2) regional output and price rise hile currency depreciates facing Japan’s price shock; (3) yen depreciation against U.S. dollar is ontractionary and deflationary to the region; and (4) regional currencies generally peg softly to U.S. ollar. We find that the open-economy New Keynesian model cannot explain these facts imultaneously. We suggest that production interconnectedness and trade in intermediate inputs are critical to comprehend macroeconomic dependence of Southeast Asia on Japan