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Transmission of Global Financial Shocks: Which Capital Flows Matter?

Author

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  • Bada Han

    (Economic Research Institute, Bank of Korea)

Abstract

In this paper, I study channels through which risk-appetite shocks to global investors, i.e., global financial shocks, are transmitted to emerging market economies (EMEs). I focus on how transmission channels have changed as EMEs have become able to borrow from abroad in the form of equity and local currency debt. First, I empirically show that much of the transmission of global financial shocks to EMEs is reflected in equity and local currency bond portfolio flows. I then develop a small open-economy model which, augmented with leverageconstrained banks, can replicate these empirical findings qualitatively. Finally, I calibrate the model to the Korean economy in which most of the external liabilities of the country are Korean won-denominated equities and debts. Quantitative analysis of the model suggests that global financial shocks are a dominant factor in financial market fluctuations and significantly contribute to the dynamics of the real economy in Korea. In short, all the analyses in this paper imply that, to a substantial extent, global financial shocks are transmitted to EMEs via fickle portfolio flows to equity and local currency bond markets in EMEs.

Suggested Citation

  • Bada Han, 2023. "Transmission of Global Financial Shocks: Which Capital Flows Matter?," International Journal of Central Banking, International Journal of Central Banking, vol. 19(1), pages 55-110, March.
  • Handle: RePEc:ijc:ijcjou:y:2023:q:1:a:2
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    References listed on IDEAS

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    1. Chari, Anusha & Dilts-Stedman, Karlye & Forbes, Kristin, 2022. "Spillovers at the extremes: The macroprudential stance and vulnerability to the global financial cycle," Journal of International Economics, Elsevier, vol. 136(C).
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    3. Albert Queralto, 2019. "Balance Sheets, Exchange Rates, and International Monetary Spillovers," 2019 Meeting Papers 993, Society for Economic Dynamics.
    4. Mr. Tobias Adrian & Christopher J. Erceg & Marcin Kolasa & Jesper Lindé & Pawel Zabczyk, 2021. "A Quantitative Microfounded Model for the Integrated Policy Framework," IMF Working Papers 2021/292, International Monetary Fund.
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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