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Volatile Rates, Fragile Growth: Global Financial Risk and Productivity Dynamics

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Abstract

Does global financial risk affect long-run growth? Using a panel state-space model for emerging and advanced small open economies, we measure the effects of U.S. monetary policy uncertainty shocks. A one-standard-deviation shock lowers the level of the stochastic trend in emerging markets by at least 25 basis points after three years, with little effect in advanced economies. A small open economy model with growth through innovation and occasionally binding borrowing constraints explains this heterogeneity: higher interest-rate volatility depresses valuations, tightens collateral constraints, and slows innovation in equilibrium. A novel interaction between the occasionally binding constraint and stochastic volatility is key for our results.

Suggested Citation

  • Nils M. Gornemann & Eugenio Rojas & Felipe Saffie, 2026. "Volatile Rates, Fragile Growth: Global Financial Risk and Productivity Dynamics," International Finance Discussion Papers 1434, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:102989
    DOI: 10.17016/IFDP.2026.1434
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    1. Rey, Hélène, 2015. "Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence," CEPR Discussion Papers 10591, Centre for Economic Policy Research.
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    Keywords

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    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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