Dynamics of Price Stability and Financial Stability in Asian Economies: An Econometric PSVAR Approach

This study aims to investigate the endogenous relationship between price stability, financial stability, and other economic variables. The study used monthly data from 2005 to 2018 of seven Asian economies (Pakistan, China, India, Hong Kong, Japan, Indonesia, and Malaysia). The Panel Structural Vector Auto-regression is used in the empirical analysis. All variables are considered endogenous and independent in the model's dynamic and static sense. This analysis suggests that financial stability and price stability shocks lack reactivity in China, Indonesia, Malaysia, Japan, and Hong Kong. The data of India and Pakistan showed asymmetric results; financial shocks do not affect the price stability that is consumer price index however, consumer price index shocks do influence the financial stability. Furthermore, the impact of stock market shocks on price and financial stability shows that, with the exception of Pakistan, no other country display discernible statistically significant impact on price and financial stability. In the case of Pakistan, a one-standard-deviation shock leads to an initial uptick in financial stability. However, the impact is short-termed and rapidly decay.