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Global financial risk, aggregate fluctuations, and unemployment dynamics

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  • Epstein, Brendan
  • Finkelstein Shapiro, Alan
  • González Gómez, Andrés

Abstract

We use a panel structural vector autoregression methodology to study the impact of global financial risk shocks in emerging market economies (EMEs) versus small open advanced economies (SOAEs). The short-term responses of GDP, investment, and un- employment are similar in EMEs compared to SOAEs, but their medium-term responses differ considerably. In EMEs the shock propagates less across GDP and investment, and the response of unemployment is prominently more subdued. Further analysis suggests that while in EMEs these dynamics can be traced back to the response of country interest rates to global financial risk shocks and to the average degree of firm informality, in SOAEs these factors are not at play. Instead, for SOAEs the dynamics of bank credit can matter to some degree, but more broadly a global financial risk shock passes through more directly into the economy.

Suggested Citation

  • Epstein, Brendan & Finkelstein Shapiro, Alan & González Gómez, Andrés, 2019. "Global financial risk, aggregate fluctuations, and unemployment dynamics," Journal of International Economics, Elsevier, vol. 118(C), pages 351-418.
    • Handle: RePEc:eee:inecon:v:118:y:2019:i:c:p:351-418
    DOI: 10.1016/j.jinteco.2019.03.005
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    Cited by:

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    3. Georgiadis, Georgios & Müller, Gernot J. & Schumann, Ben, 2021. "Global risk and the dollar," Working Paper Series 2628, European Central Bank.
    4. Breitenlechner, Max & Georgiadis, Georgios & Schumann, Ben, 2022. "What goes around comes around: How large are spillbacks from US monetary policy?," Journal of Monetary Economics, Elsevier, vol. 131(C), pages 45-60.
    5. Mahmood Ahmad & Zahoor Ahmed & Xiyue Yang & Muhlis Can, 2023. "Natural Resources Depletion, Financial Risk, and Human Well-Being: What is the Role of Green Innovation and Economic Globalization?," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 167(1), pages 269-288, June.
    6. Yildirim, Zekeriya, 2022. "Global financial risk, the risk-taking channel, and monetary policy in emerging markets," Economic Modelling, Elsevier, vol. 116(C).
    7. Horvath, Jaroslav & Rothman, Philip, 2021. "Mortgage spreads, asset prices, and business cycles in emerging countries," Journal of International Money and Finance, Elsevier, vol. 115(C).
    8. Maciej Stefański, 2021. "Macroeconomic Effects of Quantitative Easing Using Mid-sized Bayesian Vector Autoregressions," KAE Working Papers 2021-068, Warsaw School of Economics, Collegium of Economic Analysis.
    9. Dzhambova, Krastina, 2021. "“When it rains, it pours”: Fiscal policy, credit constraints and business cycles in emerging and developed economies," Journal of Macroeconomics, Elsevier, vol. 69(C).
    10. Horvath, Jaroslav & Yang, Guanyi, 2022. "Unemployment dynamics and informality in small open economies," European Economic Review, Elsevier, vol. 141(C).

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    More about this item

    Keywords

    Global financial risk; Small open emerging and advanced economies; Business cycles; Unemployment; Vector autoregressions;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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