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Sector Heterogeneity and Credit Market Imperfections in Emerging Markets

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  • Liliana Varela

    () (University of Houston)

Abstract

Interest rate shocks have a large impact on economic activities in emerging markets. This paper shows that this finding can be associated with credit market imperfections affecting principally non-tradable activities. Using a new database on credit and output at sector level, I present novel evidence documenting that tradable and non-tradable activities respond asymmetrically to changes in credit conditions in emerging markets. In particular, I show that local credit conditions explain a significant proportion of the variation in output growth in non-tradable activities, but little of the variation in output growth in tradable activities. Accordingly, interest rate shocks are amplified solely through non-tradable activities. Importantly, these distinctive features of emerging markets are absent in developed small open economies. To rationalize these findings, I introduce a simple small open economy model in which tradable and non-tradable sectors differ in their access to external finance. The model demonstrates that credit market imperfections can reverse the predictions of the standard small open economy model, in which interest rate shocks affect the capital-intensive tradable sector most. In presence of financial frictions, these shocks affect the labor-intensive non-tradable sector more.

Suggested Citation

  • Liliana Varela, 2015. "Sector Heterogeneity and Credit Market Imperfections in Emerging Markets," Working Papers 2015-350-29, Department of Economics, University of Houston.
  • Handle: RePEc:hou:wpaper:2015-350-29
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    References listed on IDEAS

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    Cited by:

    1. Senderski, Marcin, 2011. "Justifiable thrift or feverish animal spirits: What stirred the corporate credit crunch in Poland?," MPRA Paper 56613, University Library of Munich, Germany.
    2. Alan Finkelstein-Shapiro & Andrés González Gómez, 2015. "Macroprudential Policy and Labor Market Dynamics in Latin America," IDB Publications (Working Papers) 88738, Inter-American Development Bank.
    3. Alan Finkelstein Shapiro & Andres Gonzalez, 2015. "Macroprudential Policy and Labor Market Dynamics in Emerging Economies," IMF Working Papers 15/78, International Monetary Fund.

    More about this item

    Keywords

    financial frictions; interest rate shocks; emerging markets;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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