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Capital Flows, Asset Prices and Output in Emerging Market Economies

Ranjanendra Narayan Nag, Sayan Baksi and Sayantan Majumder ()

Foreign Trade Review, 2015, vol. 50, issue 1, 1-20

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.

Keywords: Capital flow; exchange rates; stock market; Tobin’s q; monetary policy (search for similar items in EconPapers)
JEL-codes: E5 F31 F32 G12 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1177/0015732514558138

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