How External Factors Affect Domestic Economy


Book Description

External headwinds, together with domestic vulnerabilities, have loomed over the prospects of emerging markets in recent years. We propose an empirical toolbox to quantify the impact of external macro-financial shocks on domestic economies in parsimonious way. Our model is a Bayesian VAR consisting of two blocks representing home and foreign factors, which is particularly useful for small open economies. By exploiting the mixed-frequency nature of the model, we show how the toolbox can be used for “nowcasting” the output growth. The conditional forecast results illustrate that regular updates of external information, as well as domestic leading indicators, would significantly enhance the accuracy of forecasts. Moreover, the analysis of variance decompositions shows that external shocks are important drivers of the domestic business cycle.




The Role of Domestic and External Shocks in Poland


Book Description

This paper discusses interlinkages between Poland and the euro zone using a simple and agnostic econometric approach. Specifically, we estimate a trend-cycle VAR model using data for real and nominal variables, imposing powerful but uncontroversial assumptions that allow us to identify how external factors affect the evolution of business cycles in Poland in the period 1999-2012. Our results suggest that developments in the euro zone can explain about 50 percent of poland’s output and interest rate business cycle variance and about 25 percent of the variance of inflation.




Foreign Versus Domestic Factors as Sources of Macroeconomic Fluctuations in Hong Kong


Book Description

This paper uses a semi-structural vector autoregression approach to estimate the relative importance of domestic and foreign shocks as sources of macroeconomic fluctuations in Hong Kong since the adoption of the currency board. We find that external factors are clearly dominant in the medium to long run. In view of the highly open nature of the Hong Kong economy and the linkages implied by the currency board arrangement, it is perhaps not unexpected. However, that these factors should account for fifty percent or more of unexpected fluctuations in real GDP and the GDP deflator at shorter horizons of one to two years is more surprising, and it is large in comparisons with other highly open small economies.Even if external shocks are dominant sources of macroeconomic fluctuations, there remain significant short-term influences of domestic variables. For example, in the historical decomposition of the evolution of output growth and inflation we discovered a significant role for domestic factors in the recent recession. Their impact resembles very much those that would be generated by a conventional aggregate supply contraction. A challenge for future research is to identity empirically the exact sources of the domestic shocks.




External factors of economic growth in the transition economies of the Baltics and Central Asia


Book Description

Doctoral Thesis / Dissertation from the year 2007 in the subject Economics - Case Scenarios, grade: 1,0, Carl von Ossietzky University of Oldenburg (Institut für Volkswirtschaftslehre und Statistik), language: English, abstract: Im Kontext der zunehmenden Verflechtung von Volkswirtschaften können Außenhandel und Kapitalströme von besonderer Bedeutung sein, wenn die Wirtschaftswachstumsperspektiven der Länder in Betracht gezogen werden. Diese Aussage findet ihre Bestätigung in entgegengesetzten Wachstumsentwicklungen der baltischen und zentralasiatischen Transformationsökonomien, welche seit den frühen 1990er Jahren bedeutsame Änderungen hinsichtlich Wirtschaftsstruktur und Handelsmuster erfahren haben. Diese Arbeit untersucht, welche Rolle externe Faktoren im Wirtschaftswachstumsprozess in den Transformationsländern des Baltikums (Estland, Lettland und Litauen) und Zentralasiens (Kasachstan, Kirgisistan und Usbekistan) spielen. Dementsprechend lautet die Leitfrage dieser Untersuchung: Sind die betrachteten Wachstumsratenunterschiede in den Transformationsländern des Baltikums und Zentralasiens auf unterschiedliche Entwicklungen in ihren externen Sektoren zurückzuführen? Um diese Frage entsprechend zu beantworten, werden die Länder hinsichtlich der einzelnen zum Wachstum beitragenden Komponenten verglichen. Diese werden empirisch durch das Anwenden des Modells des durch die Zahlungsbilanz beschränkten Wachstums ermittelt. Mit der einfachen Version des Modells lässt sich die Wachstumsleistung der betrachteten Ökonomien mit deren Handelsverhalten, d.h. Exportkapazitäten und Importzwängen verbinden. Die erweiterte Version des Modells ermöglicht, die Wachstumsraten in deren Komponenten – den Effekt des realen Tauschverhältnisses, den Effekt des Exportwachstums und den Effekt der Kapitalzuflüsse – zu zerlegen. Aus den empirischen Ergebnissen kann geschlossen werden, dass die höheren zu beobachtenden Wachstumsraten der baltischen Ökonomien – verglichen mit denen der zentralasiatischen Ökonomien – in der Periode von 1994 bis 2005 auf höhere Werte der Gesamtheit von Exportwachstum, Kapitalzuflüssen und relativen Preisentwicklungen zurückzuführen sind. Die Wachstumsunterschiede innerhalb der betrachteten Regionen können analog erklärt werden. Ferner, ist davon auszugehen, dass die unterschiedlichen Ergebnisse hinsichtlich der angestrebten regionalen Integration bei der Erklärung der unterschiedlichen Wachstumsleistungen des Baltikums und Zentralasiens in Betracht gezogen werden sollten. Das Baltikum war erfolgreicher nicht zuletzt dank der geglückten Integration mit den Ökonomien der Europäischen Union. Zentralasien hat diesbezüglich hingegen weniger erreicht.




Staying Afloat when the Wind Shifts


Book Description

We analyze banking crises using a panel of macroeconomic and financial data for more than one hundred developing countries from 1975 through 1992. We find that banking crises in emerging markets are strongly associated with adverse external conditions. In particular Northern interest rates are strongly associated with the onset of banking crises in developing countries, even after taking into account a host of internal macroeconomic factors. A one percent increase in Northern interest rates is associated with an increase in the probability of Southern banking crises of around three percent. Our results also seem insensitive to the effects of differing exchange rate regimes, external debt burdens and domestic financial structures.




The Influence of External Factors on Monetary Policy Frameworks and Operations


Book Description

Economic and financial integration has reshaped the monetary policy frameworks and transmission channels in the emerging market economies (EMEs) over the past two decades. Economic and financial linkages have become stronger, resulting in greater synchronization of business cycles across advanced and emerging market economies. This has led to the faster transmission of shocks, especially through financial channels. Against this background, the 16th annual meeting of Deputy Governors from the major emerging market economies, held at the BIS in Basel in February 2011, addressed the question of how external factors had affected monetary policy in EMEs over the past few years. The present volume brings together papers prepared for that meeting. The discussion was organized around four broad topics: international banks, new liquidity rules and monetary policy in EMEs; exchange rates and monetary policy frameworks in EMEs; the implications of foreign exchange market intervention for central bank balance sheets; and additional supporting policies that central banks can use to address the policy dilemmas from the influence of external factors. One of the main conclusions of the meeting was that financial globalization has multiplied the number of transmission channels and associated risks through which external factors influence domestic economic and financial conditions in EMEs. This complicates the assessment of the outlook for inflation and growth. It also introduces an additional dimension - the evaluation of financial stability risks - to the objectives of central banks. Monetary policy in EMEs has become much more complex as a result.







The Optimal Level and Impact of Internal Factors on Growth


Book Description

This paper empirically uses data from the world economy to show that performance of domestic factors are equally important to external factors when comes to growth. Various external and domestic factors are used to construct two separate indices and the principal component method is applied in the analysis. The empirical results show that given a different level of performance in the economy's external factors, a higher performance in the internal factors will produce a higher growth rate. When the performance of an economy's internal factors is extremely low, it would be appropriate for that economy first to improve its internal factors.




The Contributions of Domestic and External Factors to Latin American Devaluation Crises


Book Description

In this paper we develop a modified early warning system (EWS) approach to identifying the roles of domestic and external factors in Latin America's crises. Several probit models of balance-of-payments crises, based on different identified sets of crisis dates, were estimated for six Latin American countries. These models were then used to identify the separate contributions to the probabilities of crisis of domestic and external variables. Our basic finding is that, when the effect of adverse external shocks is removed from the simulated probabilities of devaluation in Latin America, the resultant simulated devaluation probabilities are still high. Taken at face value, these results indicate that devaluation crises in Latin America primarily have been a function of domestic policy and economic imbalances, with exogenous external factors playing only a secondary role. All else equal, this suggests that the adoption of strongly fixed exchange rate regimes in the region may not be too costly in terms of diminished ability to respond to exogenous external shocks.