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

Nils Gornemann, Eugenio I. Rojas and Felipe Saffie

No 34595, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: F32 F41 G15 O16 (search for similar items in EconPapers)
Date: 2025-12
New Economics Papers: this item is included in nep-fdg, nep-ifn and nep-opm
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