Abstract
I document that US financial uncertainty shocks, measured by an increase in VIX, have a substantial impact on the output of emerging market economies (EMEs) without a material impact on US output during the last two decades. To understand this puzzling phenomenon, I propose a credit channel as a propagation mechanism of US financial uncertainty shocks to EMEs. I augment a boom-bust cycle model of EMEs by Schneider and Tornell (Rev Econ Stud 71(3):883–913 2004) with a portfolio choice model of constrained international investors. As international investors pull their money from EMEs—to satisfy their Value-at-Risk constraints—in response to financial uncertainty shocks, borrowing costs increase and domestic credit contracts. Higher borrowing costs and a decline in domestic credit, in turn, lead to a fall in investment in the non-tradable sector that causes a real depreciation via currency mismatch prevalent in EMEs and a decline in total output through sectoral linkages. The empirical regularity obtained by estimating structural VARs of 18 EMEs is consistent with the prediction of the model.
| Original language | English |
|---|---|
| Pages (from-to) | 89-118 |
| Number of pages | 30 |
| Journal | Open Economies Review |
| Volume | 29 |
| Issue number | 1 |
| DOIs | |
| Publication status | Published - 2018 Feb 1 |
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All Science Journal Classification (ASJC) codes
- Economics and Econometrics
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The Impact of US Financial Uncertainty Shocks on Emerging Market Economies : An International Credit Channel. / Choi, Sangyup.
In: Open Economies Review, Vol. 29, No. 1, 01.02.2018, p. 89-118.Research output: Contribution to journal › Article
TY - JOUR
T1 - The Impact of US Financial Uncertainty Shocks on Emerging Market Economies
T2 - An International Credit Channel
AU - Choi, Sangyup
PY - 2018/2/1
Y1 - 2018/2/1
N2 - I document that US financial uncertainty shocks, measured by an increase in VIX, have a substantial impact on the output of emerging market economies (EMEs) without a material impact on US output during the last two decades. To understand this puzzling phenomenon, I propose a credit channel as a propagation mechanism of US financial uncertainty shocks to EMEs. I augment a boom-bust cycle model of EMEs by Schneider and Tornell (Rev Econ Stud 71(3):883–913 2004) with a portfolio choice model of constrained international investors. As international investors pull their money from EMEs—to satisfy their Value-at-Risk constraints—in response to financial uncertainty shocks, borrowing costs increase and domestic credit contracts. Higher borrowing costs and a decline in domestic credit, in turn, lead to a fall in investment in the non-tradable sector that causes a real depreciation via currency mismatch prevalent in EMEs and a decline in total output through sectoral linkages. The empirical regularity obtained by estimating structural VARs of 18 EMEs is consistent with the prediction of the model.
AB - I document that US financial uncertainty shocks, measured by an increase in VIX, have a substantial impact on the output of emerging market economies (EMEs) without a material impact on US output during the last two decades. To understand this puzzling phenomenon, I propose a credit channel as a propagation mechanism of US financial uncertainty shocks to EMEs. I augment a boom-bust cycle model of EMEs by Schneider and Tornell (Rev Econ Stud 71(3):883–913 2004) with a portfolio choice model of constrained international investors. As international investors pull their money from EMEs—to satisfy their Value-at-Risk constraints—in response to financial uncertainty shocks, borrowing costs increase and domestic credit contracts. Higher borrowing costs and a decline in domestic credit, in turn, lead to a fall in investment in the non-tradable sector that causes a real depreciation via currency mismatch prevalent in EMEs and a decline in total output through sectoral linkages. The empirical regularity obtained by estimating structural VARs of 18 EMEs is consistent with the prediction of the model.
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UR - http://www.scopus.com/inward/citedby.url?scp=85034046109&partnerID=8YFLogxK
U2 - 10.1007/s11079-017-9471-y
DO - 10.1007/s11079-017-9471-y
M3 - Article
VL - 29
SP - 89
EP - 118
JO - Open Economies Review
JF - Open Economies Review
SN - 0923-7992
IS - 1
ER -