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Trade, Trade Finance, and Global Liquidity in Asia; Markov-Switching FAVAR Approach

Author

Listed:
  • Brooks, Douglas H.

    () (Asian Development Bank)

  • Kurmanalieva, Elvira

    () (Eurasian Development Bank)

  • Yang, Doo Yong

    () (Kyunghee University)

Abstract

This paper analyzes why the global financial crisis in 2008 severely affected Asia's trade. Asia has been suffering from the falls in export demand from developed countries. However the abrupt trade declines in Asia are not fully explained by reactions to this as in previous experiences. The question is why the financial crisis in 2008 brought about the abrupt and deep collapse in world trade, while other world-wide recessions had more moderate effects on world trade. This paper shows that the dynamic relationship between trade and trade finance is one important factor in explaining this question. This paper also applies the Granger (causality) test to uncover different relationships in the developed and developing economies and show different results for different countries in Asia. We employ a Markov-Switching FAVAR (Factor Augmented VAR) to show that global liquidity shocks are important factors in explaining the huge and abrupt trade drops in Asia.

Suggested Citation

  • Brooks, Douglas H. & Kurmanalieva, Elvira & Yang, Doo Yong, 2016. "Trade, Trade Finance, and Global Liquidity in Asia; Markov-Switching FAVAR Approach," East Asian Economic Review, Korea Institute for International Economic Policy, vol. 20(3), pages 339-363, September.
  • Handle: RePEc:ris:eaerev:0008
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    File URL: http://dx.doi.org/10.11644/KIEP.EAER.2016.20.3.313
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    More about this item

    Keywords

    Trade Finance; Global Liquidity; Markov-Switching Factor Augmented VAR;

    JEL classification:

    • F19 - International Economics - - Trade - - - Other
    • F39 - International Economics - - International Finance - - - Other
    • G01 - Financial Economics - - General - - - Financial Crises

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