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International Financial Shocks in Emerging Markets

Michael Brei and Almira Buzaushina

No 2015-11, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: 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
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

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Journal Article: International financial shocks in emerging markets (2015) Downloads
Working Paper: International financial shocks in emerging markets (2009) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:drm:wpaper:2015-11

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