Asian economies are increasingly integrated to the global economy through trade and
financial linkages, exposing them to the international financial cycle. This paper explores
how external shocks are transmitted to Asian economies and whether the use of policies,
such as the monetary policy interest rate, foreign exchange intervention (FXI) and
macroprudential measures (MPMs), can mitigate the impact of these external shocks. It
uses panel quantile regressions on a sample of 14 Asian advanced and emerging economies
(AEs and EMs) to assess the impact of financial and real shocks on investment and GDP
growth at the median and 5th percentile tail. It finds that external financial shocks tend to
have a larger effect on Asian economies than real shocks, and that the main transmission
channels through which shocks are propagated are capital flows (particularly via corporate
and bank balance sheets) for EMs, and credit for AEs. It also finds evidence that for Asian
EMs, FXI may help dampen the capital flows and real exchange rate channels and mitigate
financial shocks in the short run, and monetary policy transmission tends to be relatively
weak; meanwhile MPMs can help mitigate the credit channel for both AEs and EMs.

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