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Uncertainty shocks, financial frictions, and business cycle asymmetries across countries

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  • Chatterjee, Pratiti

Abstract

I show that uncertainty shocks trigger sharper declines in consumption, investment, and GDP – and a sharper increase in trade balances – in emerging countries relative to advanced countries during recessions. Using an open-economy model – estimated on a set of advanced and emerging countries – I demonstrate that these facts can be explained by an interaction between uncertainty and financial frictions. In particular, the results imply that during recessions, elevated borrowing costs in emerging countries – about 5.9% greater than advanced countries – interact nonlinearly with uncertainty to generate the observed excess volatility.

Suggested Citation

  • Chatterjee, Pratiti, 2024. "Uncertainty shocks, financial frictions, and business cycle asymmetries across countries," European Economic Review, Elsevier, vol. 162(C).
    • Handle: RePEc:eee:eecrev:v:162:y:2024:i:c:s001429212300274x
    DOI: 10.1016/j.euroecorev.2023.104646
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    More about this item

    Keywords

    Advanced and emerging countries; Business cycle asymmetries; Financial frictions; Recessions; Uncertainty shocks;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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