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Capital Flows, Asset Prices and Output in Emerging Market Economies

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  • Ranjanendra Narayan Nag
  • Sayan Baksi
  • Sayantan Bandhu Majumder

Abstract

In this article we construct a simple open-economy macro model to examine how capital flows, monetary policy and dividend policies of firms influence asset prices, economic activity and inflation. In this model, we consider a three-asset framework based on domestic money, domestic equity and foreign bonds under flexible exchange rate. The model is based on the assumptions of imperfect asset substitutability and absence of sterilization. The model also incorporates an aggregate supply function in the presence of wage indexation. The model can apply to a large class of emerging market economies which have embarked on a programme of liberalization of the financial sector in general and stock market in particular.

Suggested Citation

  • Ranjanendra Narayan Nag & Sayan Baksi & Sayantan Bandhu Majumder, 2015. "Capital Flows, Asset Prices and Output in Emerging Market Economies," Foreign Trade Review, , vol. 50(1), pages 1-20, February.
    • Handle: RePEc:sae:fortra:v:50:y:2015:i:1:p:1-20
    DOI: 10.1177/0015732514558138
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    References listed on IDEAS

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    More about this item

    Keywords

    Capital flow; exchange rates; stock market; Tobin’s q; monetary policy;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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