Rilina Basu Banerjee and Ranjanendra Narayan Nag
The goal of the paper is to understand mechanisms through which an external financial shock produces macroeconomic outcomes in an emerging market economy. We examine the transmission mechanisms from two perspectives. One is the equity-finance and the other one is the bank- loan. The basic mechanism is simple. Stock market and financial intermediaries supply liquid assets to foreigners who are not committed to any long-term investment. If, for exogenous reasons, foreign investors withdraw their funds, there is a run on currency which can reduce effective demand, supply of credit and output.
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