The Trade Flow Channel And Its Effects On Trade Flows

As large interest rate differentials in favor of EMEs are expected to persist, capital inflows and possibly long term investments ensue (Lavigne et al. 2014, 25; Lim et al. 2014, 8). All of these capital inflows into EMEs due to increased demand and appetite for risk would serve to put upward pressure on asset prices and can potentially lead to financial bubbles and speculative investment as a result of the increased liquidity and risk seeking. Along with effects on capital flows, QE can also have an impact on trade flows. Another consequence of QE and its associated portfolio flows is some depreciation of the US dollar and appreciation in the real effective exchange rates of EMEs through the exchange rate channel. This would serve to lower competitiveness in EMEs and reduce imports into the US due to the increased relative prices which would drag down demand (Lavinge et al. 2014, 25). The last channel, the trade-flow channel, can serve as a positive spillback from QE which can partially offset the unfavorable changes in exchange rates. By strengthening the domestic economy in the US, QE can increase demand for EME exports and thus have a positive impact on trade. The net effect of these two channels, however, remains ambiguous and has not been quantified in existing literature. Lim, et al. suggest that rounds of QE were accompanied by increases in inflows to developing countries that were over and above these observable channels and cannot be attributed to fundamentalsShow MoreRelatedThe Link between Trade Performances and Exchange Rate Movements799 Words   |  3 PagesThe link between trade performances and exchange rate movements has been the matter of many practical studies. The literature review explains that the set of results, often in similar countries, might stem from practical proof being removed from diverse time periods and not the same methodologies. 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