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Which external shock matters in small open economies? Global risk aversion vs. US economic policy uncertainty

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  • Kim, Youngju
  • Lim, Hyunjoon
  • Sohn, Wook

Abstract

We investigate the roles of global risk aversion and US economic policy uncertainty in contributing to financial and macroeconomic fluctuations in small open economies (SOEs). We use a panel of forty SOEs that includes both advanced economies (AEs) and emerging markets economies (EMEs) to find that SOEs’ financial and economic activities exhibit relatively short-lived and robust reactions to risk aversion shocks, while responding smoothly and persistently to US policy uncertainty shocks, consistent with Bloom et al. (2018). A novel finding of this paper is that the responses of AEs and EMEs are asymmetric: AEs react more strongly to US policy uncertainty shocks while EMEs are more sensitive to risk aversion shocks. These results suggest that the channels through which each shock is transmitted to SOEs may vary.

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  • Kim, Youngju & Lim, Hyunjoon & Sohn, Wook, 2020. "Which external shock matters in small open economies? Global risk aversion vs. US economic policy uncertainty," Japan and the World Economy, Elsevier, vol. 54(C).
    • Handle: RePEc:eee:japwor:v:54:y:2020:i:c:s0922142520300128
    DOI: 10.1016/j.japwor.2020.101011
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    More about this item

    Keywords

    Risk aversion; Economic policy uncertainty; Spillovers; Small open economies;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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