Asset Prices, News Shocks, and the Trade Balance (original) (raw)
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Asset Prices, News Shocks and Current Account Fluctuations
The paper analyses the relationship between asset prices and current account positions for a broad set of 42 industrialized and emerging market countries. It presents a small two-country DSGE model, which models asset price shocks as news shocks to expectations about future fundamentals, in order to derive identi…cation restrictions, and uses a Bayesian VAR with sign restrictions to empirically test for their e¤ect. Such shocks are found to exert sizeable e¤ects on the current account positions of countries. Moreover, the e¤ects are highly heterogeneous across countries, for instance with a 10% shock to domestic equity prices relative to the rest of the world worsening the US trade balance by 1.2 percentage points, but much less so for most other economies. We …nd that this heterogeneity appears to be linked to the …nancial market depth and equity home bias of countries. Moreover, the channels via wealth e¤ects and via the real exchange rate are important for understanding the heterogeneity in the transmission.
Asian Journal of Economics and Banking, 2020
Purpose-The purpose of this paper is to investigate the impact of foreign capital shifts on economic activities and asset prices in South Korea. Design/methodology/approach-The authors in this paper apply the Bayesian threshold vector autoregressive (TVAR) model to estimate the regimes of large and low inflows of foreign capital. Then, structural impulse-response analysis is used to check whether the responses of the variables differ across the estimated regimes. The model is estimated using quarterly data of foreign capital inflows, gross domestic product (GDP), consumer price index, credit to the private non-financial sector, real effective exchange rate (REER), stock returns and house prices.
News Shocks, Monetary Policy, and Foreign Currency Positions
International Finance eJournal, 2015
Over the past two decades, before the global financial crisis, there was a rapid rise in the size of gross external portfolio positions as well as a decrease in the net negative foreign currency exposure in external balance sheets. In this paper, we present a theoretical model in which these portfolio facts can be explained by changes in monetary policy rules and the composition of shocks that underlie economic fluctuations. We find that policies with a strong emphasis on price stability would imply shorter positions in foreign currency when the dominant sources of fluctuations are supply shocks. The model suggests that longer and larger foreign currency positions, as observed in the data, would be consistent with a world in which central banks are more committed to price stability, and that changes in economic conditions come mainly from demand shocks. Moreover, in this case, a move toward flexible exchange rate regimes would also imply larger equilibrium portfolios and these would...
Asset Prices and Current Account Fluctuations in G-7 Economies
IMF Staff Papers, 2009
This paper is forthcoming in IMF Staff Papers. We would like to thank the participants at the conference on "Current Account Sustainability in Major Advanced Economies" at the University of Wisconsin, Madison, and in particular our discussant, Ken West, as well as Akito Matsumoto and an anonymous referee for comments and discussion. The views expressed in this paper are those of the authors and do not necessarily reflect those of the European Central Bank.
Structural change and asset pricing in emerging markets
Journal of International Money and Finance, 1998
Dans cet article, nous montrons limportance dutiliser des tests de changement structurel dans le contexte des marchés boursiers en émergence. Les modèles de valorisation des actifs financiers utilisés dans ce contexte sont en général des modèles conditionnels à facteurs fondés sur des facteurs à caractère international tels les rendements excédentaires sur le marché mondial des actions, les écarts de taux captant la prime de risque et la prime de terme, ainsi que dautres variables visant à mesurer les fluctuations du cycle économique mondial. Nous montrons que dans de nombreux pays, bien que nous ne puissions pas rejeter les modèles en fonction des tests de suridentification habituels de distribution chi-carré, nous les rejetons en fonction des tests de changement structurel, notamment lorsque nous utilisons des facteurs internationaux. Nous trouvons des résultats beaucoup plus favorables aux modèles et une plus grande stabilité lorsque nous testons un CAPM local avec des portefeuilles ordonnés selon la taille. Un effet de taille persiste toutefois dans certains pays. This paper documents the importance of testing for structural change in the context of emerging markets. Typically, asset pricing factor models for emerging markets are conditioned on world financial market factors such as world equity excess returns, risk and maturity spreads as well as other variables designed to capture world business cycle fluctuations. We show that for many countries, while we cannot reject the model according to one usual chi-square test for overidentifying restrictions, we reject it on the basis of structural change tests, especially when international factors are considered. Much better support and greater stability are found when a local CAPM is tested with size-ranked portfolios. Some evidence of a small-size effect persists for some countries.
Review of International Economics, 2013
During the 2000s, we observed the accumulation of global imbalances resulting primarily from massive current account imbalances in the USA and in Asia. This paper studies the impact of external shocks on East Asian countries in order to determine if these can account for the Asian side of global imbalances. To this end, we estimate a structural vector autoregression (VAR) model with block exogeneity using Bayesian inference. The three external shocks are an oil shock, a US monetary shock and a US financial shock. Our main findings are as follows: (i) external shocks account for the current account surplus in Korea, Malaysia, the Philippines, Singapore, and Thailand and, to a lesser extent, in Japan and Indonesia; (ii) the oil shock and the US monetary shock seem to have influenced current account balances through real and monetary channels, and the US financial shock through the financial channel.
News Shocks and Terms of Trade : A Quantitative Investigation ∗
2012
In this paper we investigate the effects of “news shocks” to technology on the terms of trade. To do so, we augment a standard, frictionless model of the international business cycle with news shocks and check the changes in the model’s prediction with regard to persistence and volatility of model-generated data. Our results show that news can increase the persistence of the terms of trade, but decrease its variability, albeit slightly. We provide intuitive explanations for the above based on two theoretical assertions. First, news-shocks generate wealth effects; hence, movements in relative prices reflect changes in relative demands for the home and foreign goods. Second, the desire for consumption-smoothing urges agents to smooth-out this wealth effect. Coupled with complete markets, the processes of consumption and investment are smooth and persistent.
Spillovers to Emerging Markets from US Economic News and Monetary Policy
IMF Working Papers, 2023
When the U.S. economy sneezes, do emerging markets catch a cold? We show that economic news, and not just monetary policy, in the United States affects financial conditions in emerging markets. News about U.S. employment has the strongest effects, followed by news about economic activity and about vaccines during the COVID-19 pandemic. News about inflation has instead limited effects on average. A key channel of international transmission of U.S. economic news appears to be the risk perceptions or risk aversion of international investors. We also show that some of the transmission of U.S. economic news occurs independently of the U.S. monetary policy reaction. Finally, we expand on evidence that financial conditions in the U.S. and emerging markets respond differently to U.S. monetary policy surprises, depending on the reaction of US stock prices.
JDE (Journal of Developing Economies) , 2016
Capital flows to developing countries and emerging markets in the world is constantly increasing. However, the crisis that occurred in 2008 and 2011 caused concern for investors. A series of policies have been carried out in several emerging market countries to take steps prudence in controlling capital flows. This study aimed to analyze the response of asset prices to the shock caused by capital inflows, interest rates and exchange rates and analyzes the contribution of shock in capital inflows, interest rates and exchange rates on asset prices in 16 emerging market countries (India, Brazil, Russia, Indonesia, Republic of South Africa, Mexico, Thailand, South Korea, Colombia, Philippines, Egypt, Hong Kong, Peru, Czech, Bangladesh, Hungary) in the year 2001-2015. The method used is quantitative method using Panel Vector Auto Regression models. The results of this study show that the first shock of positive capital inflows will affect asset prices, both that a positive shock on interest rates will affect asset prices, the third that the positive shock of the exchange rate would affect asset prices. The variables that have the biggest contribution in influencing asset prices is the exchange rate which further interest rates and the smallest is the capital inflows.
Market Shocks in the G7 Countries
Open Economies Review
This paper investigates the impact of unanticipated increases in share prices on economic activity in the G7 countries-Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. Share prices contain information about the current and future state of the economy. We investigate whether different measures of optimism, all of which contain the unanticipated increase in share prices, affect key macroeconomic variations. In particular, do bouts of optimism stimulate economic growth? If so, are the economic booms sustained for a long period of time? To answer our research questions, we use structural vector autoregression models, and three different identification strategies. We address the interdependence between interest rate shocks and stock market shocks, using short-run and long-run restrictions, as