The Impact of a Loss of Confidence in Emerging Market Economies to the World Economy: A Simulation with the G-Cubed Model

Mansur, Alfan (2016): The Impact of a Loss of Confidence in Emerging Market Economies to the World Economy: A Simulation with the G-Cubed Model. Published in: Kajian Ekonomi dan Keuangan , Vol. 1, No. 3 (26 January 2018): pp. 143-164.

Abstract

Risks in emerging market economies have considerably gone up as capital inflows have soared since the global financial crises in 2008. Once the advanced economies recover, especially in the US where its monetary stimulus ends, market expectations change. It may then potentially lead to sudden capital outflows from emerging economies which could lead to loss of confidence in the emerging market economies. To study the impacts of such event, this paper simulates with the G-Cubed Model. The results show that once financial shocks hit emerging market economies, it can produce critical real effects in the economic downturn which will last for a long period. The simulation also shows the strong interdependence between financial and real economies. In the emerging economies, expected future incomes and wealth fall, while the developed economies gain through the reallocation of investment. Another important channel of the shocks is through trade channel as most emerging market economies rely on imports for their production inputs.

• Item Type: MPRA Paper
• Language: English
• Keywords: Loss of confidence, emerging market economies, G-Cubed model, financial shocks
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C50 - General; D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D58 - Computable and Other Applied General Equilibrium Models; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E27 - Forecasting and Simulation: Models and Applications; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F40 - General

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