On Foreign Drivers of EMEs Fluctuations

Global macroeconomic forces such as liquidity fluctuations in the US and commodity price cycles among others have been extensively documented as relevant drivers of economic activity for emerging market economies (EMEs). The dynamics of the interactions between those external forces and their ensuing effect on EMEs business cycles, however, are still relatively less explored. We embed a series of different contemporary interactions between a set of common, external drivers shaping EMEs cycles in order to assess their relative empirical importance through the lens of a dynamic factor model. Our results point toward quantitatively relevant effects induced by shocks to the global factors that we identify. Indeed, while shocks to our financial and commodity factors explain independently about 7 and 21% of GDP fluctuations, respectively, they unload rather differently on long term yields and exchange rates: the financial factor explains about half of exchange rate dynamics and more than a fifth of long rates, where our commodity factor ends up playing a much lesser role.