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The impact of uncertainty shocks in emerging economies

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  • Carrière-Swallow, Yan
  • Céspedes, Luis Felipe

Abstract

A recent strand of research proposes that sudden jumps in uncertainty generate rapid drops and recoveries in real macroeconomic variables that drive the business cycle. Using an empirical model, we find substantial heterogeneity in reactions to these shocks across countries. In comparison to the U.S. and other developed countries, emerging economies suffer much more severe falls in investment and private consumption following an exogenous uncertainty shock, take significantly longer to recover, and do not experience a subsequent overshoot in activity. We provide evidence that the dynamics of investment and consumption are correlated with the depth of financial markets. We control for the potential role of a credit channel, and estimate that it can account for up to one-half of the increased fall in investment generated by uncertainty shocks among emerging economies with less-developed financial markets. In this context, monetary and fiscal policy actions that alleviate the impact of credit constraints facing firms may reduce the impact of uncertainty shocks in these economies.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 90 (2013)
Issue (Month): 2 ()
Pages: 316-325

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Handle: RePEc:eee:inecon:v:90:y:2013:i:2:p:316-325

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Web page: http://www.elsevier.com/locate/inca/505552

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Keywords: Uncertainty; Emerging markets; Credit; Vector autoregression;

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References

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Cited by:
  1. Gustavo Adler & Camilo Ernesto Tovar Mora, 2012. "Riding Global Financial Waves," IMF Working Papers 12/188, International Monetary Fund.
  2. Scott R. Baker & Nicholas Bloom, 2013. "Does Uncertainty Reduce Growth? Using Disasters as Natural Experiments," NBER Working Papers 19475, National Bureau of Economic Research, Inc.
  3. Gustavo Adler & Sebastian Sosa, 2013. "External Conditions and Debt Sustainability in Latin America," IMF Working Papers 13/27, International Monetary Fund.
  4. Ambrogio Cesa-Bianchi & M. Hashem Pesaran & Alessandro Rebucci, 2014. "Uncertainty and Economic Activity: A Global Perspective," CESifo Working Paper Series 4736, CESifo Group Munich.
  5. Yves S. Schüler, 2014. "Asymmetric Effects of Uncertainty over the Business Cycle: A Quantile Structural Vector Autoregressive Approach," Working Paper Series of the Department of Economics, University of Konstanz 2014-02, Department of Economics, University of Konstanz.

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