The Impact of US Financial Uncertainty Shocks on Emerging Market Economies

An International Credit Channel

Research output: Contribution to journalArticle

6 Citations (Scopus)

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 languageEnglish
Pages (from-to)89-118
Number of pages30
JournalOpen Economies Review
Volume29
Issue number1
DOIs
Publication statusPublished - 2018 Feb 1

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Uncertainty
Emerging market economies
Credit channel
Investors
Credit
Borrowing
Costs
Linkage
Depreciation
Value at risk
Propagation mechanism
Regularity
Currency mismatch
Structural VAR
Volatility index
Pull
Portfolio choice
Prediction
Choice models

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Cite this

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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 journalArticle

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