International Risk Taking Channel in Emerging Markets

Giovanna Bua ()

Departmental Working Papers from Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano

Abstract: Using a two-countries recursive vector autoregressions (VAR), we study the dynamic relations between US long and short interest rate shocks, risk aversion and uncertainty, gross capital flows and credit. We focus on six Emerging Markets (South Africa, Peru, Philippines, Indonesia, Turkey, Brazil) and we look, first, at the impact of U.S. monetary policy shocks on total gross capital inflows and credit; second, we look at whether these shocks have a different impact on different type of flows; and finally we augment the VAR with US long term interest rate and we look at its impact on gross flows composition. The results bring evidence that restrictive monetary policy increases market risk aversion and decreases gross capital flows and credit. Also the analysis on gross flows breakdown suggests that the results are mainly driven by portfolio investment, suggesting that debt and equity flows may act as transmission mechanism of the monetary policy in Emerging Markets. Finally, we show that when we include long term rate in the model - that we interpret as shocks to the term premium - the impact of monetary policy shocks and risk aversion on the variables of interests diminishes and it turns evident the negative impact of the term premium on portfolio investment.

Keywords: Monetary Policy; Risk-taking Channel; Gross Capital Flows; Emerging Markets (search for similar items in EconPapers)
JEL-codes: F32 F33 F34 (search for similar items in EconPapers)
Date: 2016-02-06
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