External shocks, cross-border flows and macroeconomic risks in emerging market economies

We study the relationship between cross-border flows and risks to macroeconomic stability for a sample of ten major emerging market economies (EMEs) from 2000 to 2017 in the presence of external shocks. We examine this relationship with a focus on two key channels of cross-border flows, namely external debt securities (EDS) and cross-border loans (CBLs). Our analysis focuses on the transition in cross-border flows post-global financial crisis 2008 (GFC) termed as the second phase of global liquidity (Shin in Keynote address at Federal Reserve Bank of San Francisco Asia economic policy conference, 2013). Panel vector autoregression estimations show that volatility in global risk perception affects cross-border flows to EMEs more as compared to the effect of the US monetary policy stance. Post-GFC, EDS flows rise with shocks in global risk perception, while CBL flows register a decline. CBL flows are also associated with larger risks post-GFC compared to the pre-GFC period, which is in contrast to the result for EDS flows. Second, a panel threshold estimation confirms a nonlinear association between EDS/CBL flows and macroeconomic risks largely dependent upon global uncertainty. US GDP growth also affects the nonlinearity, but US federal funds rate have insignificant threshold effects. Our results conclude that global uncertainty is a significant driver of cross-border flows to EMEs post-GFC and that it is a strong signal in determining riskiness of EDS flows and CBL flows for EMEs.