EME financial conditions: Which global shocks matter?

Abstract

This paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB.

China's Footprint in Global Financial Markets

“…Lutkepohl and Netsunajev, 2012), which are provided by the local projection estimation. We follow the R-Squared estimator proposed by Gorodnichenko and Lee (2020) in a panel context (see also Lodge and Manu, 2022). For global equity markets, we find that China macro risk shocks matter, but much less than US shocks or global risks shocks.…”

“…By now, Chinaspecific variables appear sufficiently reflective of market conditions to extract information from their co-movement to identify what is driving these assets. Once we have the identified shocks, we use these to map out the global spillovers from China to financial markets in the rest of the world and to commodities using local projections à la Jordà (2005), similar to the approach of Lodge and Manu (2022). The novelty of our approach, in which we identify shocks stemming from both China and the US, also allows us to compare the relative importance of spillovers from the two countries.…”

Exchange Rate Pass-Through in Emerging Asia and Exposure to External Shocks

“…In addition, given rising levels of global financial integration, EMEs are vulnerable to global financial shocks and monetary spillovers, notably via the exchange rate channel (Han & Wei, 2018). For example, shifts in global risk sentiment have played a significant role in affecting financial conditions of EMEs in recent years (Lodge & Manu, 2022). Several papers have pointed out the factors affecting the elasticity and magnitude of ERPT through various macroeconomic models and empirical studies over time (see among others; Amiti et al, 2016;Bonadio et al, 2020;Devereux et al, 2015;Gopinath et al, 2010).…”