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[2012-10]Analysis of Channels through which Financial Easing in Advanced Countries Is Transmitted to Emerging Market Countries and Its Influences

Research Department (Emerging Economies Team, Global Economy Research Division, Research Department(Tel : 02-759-5267)) 2012.11.01 1579
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Since the global financial crisis in 2008, major advanced countries have actively conducted financial easing policies such as the policy rate cuts and quantitative easing (QE) in order to get the economy back to normal. With ample global liquidity owing to financial easing in advanced countries, capital inflows into international commodity markets and emerging market countries have increased greatly. This has served as a factor in pushing up international commodity prices and it has been transmitted to the real economy through a rise in stock prices and currency appreciation in emerging market countries. In this way, advanced countries’ financial easing can give rise to changes in both the financial and the real economy in emerging market countries through the run-up in commodity prices, the fall in interest rates, the increase in asset prices and exchange rate appreciation.

This paper estimates a panel VAR model-based impulse response function in order to grasp four channels through which financial easing in advanced countries is transmitted to the economies of emerging market countries – the commodity price channel, the interest rate channel, the asset price channel and the exchange rate channel- and to analyze its influence on the economies. The analysis results show that, while financial easing in advanced countries can have a positive influence on the economies of emerging market countries in the short term by way of these four channels, it can also act as a negative factor, causing price hikes and a reduction in economic growth over time. In addition, the results of simultaneous equations model estimation considering the structural relations between variables in advanced market countries and emerging market countries, generally seem to lend support to the influence exerted through the above-mentioned transmission channels.

It is unlikely to be easy for the economies of major advanced countries which for long led the global economy, including the US and the euro area, to return to normal at an early stage in the current economic circumstances which present a subdued pattern. Hence, the role of emerging market countries in getting the world economy back on track seems to be more important than ever. Therefore, emerging market countries should make efforts to minimize the possible negative influence of persistent financial easing in advanced countries, while consolidating the internal stability of their economies. Furthermore, advanced countries have to make every effort to bring about a swift recovery of their economies by taking rapid step, in response to crises. However, since financial easing can rather have a negative influence not only on their own economies but also on those of emerging market countries, advanced countries should exercise caution in their conduct of policy by, for instance, implementing an exit strategy within an appropriate time frame.