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The Effects of Financial Shocks on Macroeconomic Variables and Monetary Policy in Emerging Market Economies

24 Pages Posted: 4 Feb 2021 Publication Status: Under Review

See all articles by K. Batu Tunay

K. Batu Tunay

Marmara University - Department of Capital Market

Necla Tunay

Marmara University, School of Banking and Insurance, Department of Insurance

Abstract

In this study, the effects of financial shocks on macroeconomic variables and monetary policy in small open emerging market economies are analyzed both theoretically and empirically. Clarida et al. (1999) model was developed by adding financial stability as suggested by Tunay and Tunay (2019). Then, the macroeconomic effects of financial shocks and the reaction of the central bank to it were analyzed empirically. Using data set collected from Brazil, China, India, Russia, South Africa and Turkey, a structural panel VAR model was estimated. The findings show that the financial shock caused significant and permanent fluctuations in the output gap, inflation and interest rate. In addition, it has been observed that the inclusion of financial stability in the central bank's objective function causes asymmetric effects on the output gap and inflation, and deepens the bank's political trade-off.

Keywords: Emerging market economies, financial shocks, monetary policy, panel structural VAR models.

JEL Classification: C33, E44, E58, G01

Suggested Citation

Tunay, K. Batu and Tunay, Necla, The Effects of Financial Shocks on Macroeconomic Variables and Monetary Policy in Emerging Market Economies. Available at SSRN: https://ssrn.com/abstract=3779162 or http://dx.doi.org/10.2139/ssrn.3779162

K. Batu Tunay (Contact Author)

Marmara University - Department of Capital Market ( email )

Istanbul
Turkey

Necla Tunay

Marmara University, School of Banking and Insurance, Department of Insurance ( email )

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