International Financial Shocks in Emerging Markets
Michael Brei and
No 2015-11, EconomiX Working Papers from University of Paris Nanterre, EconomiX
The present paper investigates how an emerging market economy is affected when it suddenly faces a higher risk premium on international capital markets. We study this question empirically for five Latin American economies over the period 1994-2007 within a structural panel vector autoregression and analyze theoretically the transmission mechanism using a dynamic stochastic general equilibrium model (DSGE) of a small open economy. The financial shock is modeled by an unexpected increase in the risk premium of firms’ foreign-currency debt. In response, the adverse shock is amplified by a feedback mechanism between currency depreciation, adverse balance sheet and risk premium effects. The theoretical model is used to study different monetary policy responses. We find that an exchange rate targeting rule that strikes a balance between exchange rate and inflation targeting allows the monetary authority to stabilize inflation and output more effectively than under a pure inflation targeting rule.
Keywords: Emerging Markets; Financial Crises; International Capital Markets. (search for similar items in EconPapers)
JEL-codes: F34 F36 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ifn, nep-mon and nep-opm
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Journal Article: International financial shocks in emerging markets (2015)
Working Paper: International financial shocks in emerging markets (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:drm:wpaper:2015-11
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