Bank Balance Sheets and External Shocks in Asia: The Role of Fxi, Mpms and Cfms

44 Pages Posted: 9 Mar 2021

See all articles by Zefeng Chen

Zefeng Chen

Stanford University, School of Humanities & Sciences, Department of Economics, Stanford University, Department of Economics, Students

Sanaa Nadeem

International Monetary Fund (IMF)

Shanaka Peiris

International Monetary Fund (IMF) - African Department

Date Written: January 2021

Abstract

In emerging Asia, banks constitute the dominant source of financing consumption and investment, and bank balance sheets comprise large gross FX assets and liabilities. This paper extends the DSGE model of Gertler and Karadi (2011) to incorporate these key features and estimates a panel vector autoregression on ten Asian economies to understand the role of the banking sector in transmitting spillovers from the global financial cycle to small open economies. It also evaluates the effectiveness of foreign exchange intervention (FXI) and other macroeconomic policies in responding to external financing shocks. External financial shocks affect net external liabilities of banks and the exchange rate, leading to changes in credit supply by banks and investment. For example, a capital outflow shock leads to a deprecation that reduces the net worth and intermediation capacity of banks exposed to foreign currency liabilities. In such cases, the exchange rate acts as shock amplifier and sterilized FXI, often deployed by Asian economies, can help cushion the economy. By contrast, with real shocks, the exchange rate serves as a shock absorber, and any FXI that weakens that function can be costly. We also explore the effectiveness of the monetary policy interest rate, macroprudential policies (MPMs) and capital flow management measures (CFMs).

JEL Classification: E32, E44, F32, F41, F21, F22, F24, F62, F63, F65, E25, F31, H83

Suggested Citation

Chen, Zefeng and Nadeem, Sanaa and Peiris, Shanaka, Bank Balance Sheets and External Shocks in Asia: The Role of Fxi, Mpms and Cfms (January 2021). IMF Working Paper No. 2021/010, Available at SSRN: https://ssrn.com/abstract=3799602

Zefeng Chen (Contact Author)

Stanford University, School of Humanities & Sciences, Department of Economics, Stanford University, Department of Economics, Students ( email )

Stanford, CA
United States
6507722128 (Phone)
6507722128 (Fax)

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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