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Balance Sheet Effects on Monetary and Financial Spillovers: The East Asian Crisis Plus 20

Author

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  • Joshua Aizenman
  • Menzie D. Chinn
  • Hiro Ito
Abstract
We study how the financial conditions in the Center Economies [the U.S., Japan, and the Euro area] impact other countries over the period 1986 through 2015. Our methodology relies upon a two-step approach. We focus on five possible linkages between the center economies (CEs) and the non-Center economics, or peripheral economies (PHs), and investigate the strength of these linkages. For each of the five linkages, we first regress a financial variable of the PHs on financial variables of the CEs while controlling for global factors. Next, we examine the determinants of sensitivity to the CEs as a function of country-specific macroeconomic conditions and policies, including the exchange rate regime, currency weights, monetary, trade and financial linkages with the CEs, the levels of institutional development, and international reserves. Extending our previous work (Aizenman et al. (2016)), we devote special attention to the impact of currency weights in the implicit currency basket, balance sheet exposure, and currency composition of external debt. We find that for both policy interest rates and the real exchange rate (REER), the link with the CEs has been pervasive for developing and emerging market economies in the last two decades, although the movements of policy interest rates are found to be more sensitive to global financial shocks around the time of the emerging markets’ crises in the late 1990s and early 2000s, and since 2008. When we estimate the determinants of the extent of connectivity, we find evidence that the weights of major currencies, external debt, and currency compositions of debt are significant factors. More specifically, having a higher weight on the dollar (or the euro) makes the response of a financial variable such as the REER and exchange market pressure in the PHs more sensitive to a change in key variables in the U.S. (or the euro area) such as policy interest rates and the REER. While having more exposure to external debt would have similar impacts on the financial linkages between the CEs and the PHs, the currency composition of international debt securities does matter. Economies more reliant on dollar-denominated debt issuance tend to be more vulnerable to shocks emanating from the U.S.

Suggested Citation

  • Joshua Aizenman & Menzie D. Chinn & Hiro Ito, 2016. "Balance Sheet Effects on Monetary and Financial Spillovers: The East Asian Crisis Plus 20," NBER Working Papers 22737, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:22737
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    References listed on IDEAS

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    Cited by:

    1. Joshua Aizenman & Menzie Chinn & Hiro Ito, 2023. "The Impacts of Financial Crises on the Trilemma Configurations," Open Economies Review, Springer, vol. 34(3), pages 479-517, July.
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    6. Carrera, Jorge & Montes-Rojas, Gabriel & Toledo, Fernando, 2023. "Global financial cycle, commodity terms of trade and financial spreads in emerging markets and developing economies," Structural Change and Economic Dynamics, Elsevier, vol. 64(C), pages 179-190.
    7. Mariko Tanaka & Shin-ichi Fukuda, 2019. "Spillover Effects of Asian Financial Markets on the Global Markets," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 15(1), pages 151-174, July.
    8. Georgios Georgiadis & Feng Zhu, 2019. "Monetary policy spillovers, capital controls and exchange rate flexibility, and the financial channel of exchange rates," BIS Working Papers 797, Bank for International Settlements.
    9. Joshua Aizenman & Menzie D. Chinn & Hiro Ito, 2020. "Financial Spillovers and Macroprudential Policies," Open Economies Review, Springer, vol. 31(3), pages 529-563, July.
    10. Beirne, John & Renzhi, Nuobu & Volz, Ulrich, 2021. "When the United States and the People’s Republic of China Sneeze: International Real and Financial Spillovers in Asia," ADBI Working Papers 1288, Asian Development Bank Institute.
    11. Ahmed, Shaghil & Coulibaly, Brahima & Zlate, Andrei, 2017. "International financial spillovers to emerging market economies: How important are economic fundamentals?," Journal of International Money and Finance, Elsevier, vol. 76(C), pages 133-152.
    12. Shin-ichi Fukuda & Mariko Tanaka, 2017. "The Impacts of Emerging Asia on Global Financial Markets," CIRJE F-Series CIRJE-F-1050, CIRJE, Faculty of Economics, University of Tokyo.
    13. Fang, Yi & Jing, Zhongbo & Shi, Yukun & Zhao, Yang, 2021. "Financial spillovers and spillbacks: New evidence from China and G7 countries," Economic Modelling, Elsevier, vol. 94(C), pages 184-200.
    14. Chokri Zehri & Zagros Madjd‐Sadjadi, 2024. "Capital flow management and monetary policy to control credit growth," Economics and Politics, Wiley Blackwell, vol. 36(2), pages 637-676, July.
    15. Mateane, Lebogang, 2023. "Risk preferences, global market conditions and foreign debt: Is there any role for the currency composition of FX reserves?," Research in Economics, Elsevier, vol. 77(3), pages 402-418.
    16. Klaassen, Franc & Mavromatis, Kostas, 2024. "Exchange market pressure in interest rate rules," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 93(C).
    17. Feng, Ling & Pei, Tingting & Zhou, Zhiguang, 2024. "The impact of U.S. monetary policy on Chinese firms’ innovation," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 1097-1111.
    18. Cortes, Gustavo S. & Gao, George P. & Silva, Felipe B.G. & Song, Zhaogang, 2022. "Unconventional monetary policy and disaster risk: Evidence from the subprime and COVID–19 crises," Journal of International Money and Finance, Elsevier, vol. 122(C).
    19. Loipersberger, Florian & Matschke, Johannes, 2022. "Financial cycles and domestic policy choices," European Economic Review, Elsevier, vol. 143(C).
    20. John Beirne & Nuobu Renzhi & Ulrich Volz, 2023. "When the United States and the People’s Republic of China Sneeze: Monetary Policy Spillovers to Asian Economies," Open Economies Review, Springer, vol. 34(3), pages 519-540, July.

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    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F2 - International Economics - - International Factor Movements and International Business
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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