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The Impact of Uncertainty Shocks in Emerging Economies

  • Yan Carrière–Swallow
  • Luis Felipe Céspedes

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 the 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. Once we control for the potential role of credit constraints, we find that investment and consumption dynamics in emerging economies are similar to those in developed economies. In this context, monetary and fiscal policy actions that alleviate the impact of credit constraints facing firms and households may reduce the impact of uncertainty shocks in these economies.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 646.

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Date of creation: Nov 2011
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Handle: RePEc:chb:bcchwp:646
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