Bank Balance Sheets and External Shocks in Asia: The Role of Fxi, Mpms and Cfms

In emerging Asia, banks constitute the dominant source of financing consumption and investment, bank balance sheets comprise large gross FX assets liabilities. This paper extends DSGE model Gertler Karadi (2011) to incorporate these key features estimates a panel vector autoregression on ten Asian economies understand role banking sector in transmitting spillovers from global financial cycle small open economies. It also evaluates effectiveness foreign exchange intervention (FXI) other macroeconomic policies responding external shocks. External shocks affect net liabilities rate, leading changes credit supply by investment. For example, capital outflow shock leads deprecation that reduces worth intermediation capacity exposed currency such cases, rate acts as amplifier sterilized FXI, often deployed economies, can help cushion economy. By contrast, with real shocks, serves absorber, any FXI weakens function be costly. We explore monetary policy interest macroprudential (MPMs) flow management measures (CFMs).