The Transmission of External Shocks in Asia: Country Characteristics and Policy Responses

25 Pages Posted: 9 Mar 2021

See all articles by Pragyan Deb

Pragyan Deb

International Monetary Fund (IMF); London School of Economics & Political Science (LSE) - Financial Markets Group

Sanaa Nadeem

International Monetary Fund (IMF)

Shanaka Peiris

International Monetary Fund (IMF) - African Department

Date Written: January 1, 2021

Abstract

Asian economies are increasingly integrated to the global economy through trade and financial linkages, exposing them to the international financial cycle. This paper explores how external shocks are transmitted to Asian economies and whether the use of policies, such as the monetary policy interest rate, foreign exchange intervention (FXI) and macroprudential measures (MPMs), can mitigate the impact of these external shocks. It uses panel quantile regressions on a sample of 14 Asian advanced and emerging economies (AEs and EMs) to assess the impact of financial and real shocks on investment and GDP growth at the median and 5th percentile tail. It finds that external financial shocks tend to have a larger effect on Asian economies than real shocks, and that the main transmission channels through which shocks are propagated are capital flows (particularly via corporate and bank balance sheets) for EMs, and credit for AEs. It also finds evidence that for Asian EMs, FXI may help dampen the capital flows and real exchange rate channels and mitigate financial shocks in the short run, and monetary policy transmission tends to be relatively weak; meanwhile MPMs can help mitigate the credit channel for both AEs and EMs.

JEL Classification: E32, E44, F32, F41, F21, F31, E43, E50

Suggested Citation

Deb, Pragyan and Nadeem, Sanaa and Peiris, Shanaka, The Transmission of External Shocks in Asia: Country Characteristics and Policy Responses (January 1, 2021). IMF Working Paper No. 2021/003, Available at SSRN: https://ssrn.com/abstract=3799595

Pragyan Deb (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Sanaa Nadeem

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Shanaka Peiris

International Monetary Fund (IMF) - African Department ( email )

1700 19th Street, NW
Washington, DC 20431
United States

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