The Transmission of External Shocks in Asia: Country Characteristics and Policy Responses

By Pragyan Deb, Sanaa Nadeem, Shanaka J Peiris

January 8, 2021

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Pragyan Deb, Sanaa Nadeem, and Shanaka J Peiris. The Transmission of External Shocks in Asia: Country Characteristics and Policy Responses, (USA: International Monetary Fund, 2021) accessed November 12, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Asian economies are increasingly integrated to the global economy through trade and financial linkages, exposing them to the international financial cycle. This paper explores how external shocks are transmitted to Asian economies and whether the use of policies, such as the monetary policy interest rate, foreign exchange intervention (FXI) and macroprudential measures (MPMs), can mitigate the impact of these external shocks. It uses panel quantile regressions on a sample of 14 Asian advanced and emerging economies (AEs and EMs) to assess the impact of financial and real shocks on investment and GDP growth at the median and 5th percentile tail. It finds that external financial shocks tend to have a larger effect on Asian economies than real shocks, and that the main transmission channels through which shocks are propagated are capital flows (particularly via corporate and bank balance sheets) for EMs, and credit for AEs. It also finds evidence that for Asian EMs, FXI may help dampen the capital flows and real exchange rate channels and mitigate financial shocks in the short run, and monetary policy transmission tends to be relatively weak; meanwhile MPMs can help mitigate the credit channel for both AEs and EMs.

Subject: Capital flows, Central bank policy rate, Credit, Exchange rates, Real exchange rates

Keywords: Balance sheet, Capital flows measures, EM growth, EM investment, Exchange rate channel, Foreign exchange intervention, International financial cycle, Investment EMs, Macroprudential measures, Monetary policy, Spillovers, Transmission channels, Transmission mechanism, WP

Publication Details

Pages:

24
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/003
Stock No:

WPIEA2021003
ISBN:

9781513566115
ISSN:

1018-5941

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