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

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Listed:
  • Nils Gornemann
  • Eugenio I. Rojas
  • Felipe Saffie

Abstract

We document that rising volatility in U.S. interest rates, a key dimension of global financial risk, notably depresses the trend of economic activity in emerging market economies (EMEs) but not in advanced economies (AEs). Using a panel state-space model, we show that a one standard- deviation shock to U.S. monetary policy uncertainty permanently lowers the level of GDP in EMEs by about 25 basis points after three years, with negligible effects in AEs. We rationalize this fact in a small open economy model where firms borrow against future profits to finance innovation. Higher volatility compresses firm values, tightens collateral constraints, and endogenously slows productivity growth, especially when financial frictions are severe.

Suggested Citation

  • Nils Gornemann & Eugenio I. Rojas & Felipe Saffie, 2025. "Volatile Rates, Fragile Growth: Global Financial Risk and Productivity Dynamics," NBER Working Papers 34595, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:34595
    Note: EFG IFM PR
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    More about this item

    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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