Interaction of Central Banks' Monetary Policy: Evidence from China and South Korea

This paper analyzes the spillover effects of the China's monetary policy on the Korea's monetary policy using a vector autoregressive (VAR) model. Our empirical results show that China's monetary policy has significant impact on South Korea's monetary policy, and specifically, Chinese monetary policy has significant impact on South Korea's benchmark interest rate in the short term. In the longer-term, the Chinese Central Bank's monetary policy is also found to have significant influence on the South Korean's M2. Our results also show that the Chinese monetary policy adjustments have not significant impact on the Korean prices in terms of CPI, mainly due to the Korea's strict core inflation target.