Uncertainty shocks, financial frictions, and business cycle asymmetries across countries

Pratiti Chatterjee

European Economic Review, 2024, vol. 162, issue C

Abstract: I show that uncertainty shocks trigger sharper declines in consumption, investment, and GDP – and a sharper increase in trade balances – in emerging countries relative to advanced countries during recessions. Using an open-economy model – estimated on a set of advanced and emerging countries – I demonstrate that these facts can be explained by an interaction between uncertainty and financial frictions. In particular, the results imply that during recessions, elevated borrowing costs in emerging countries – about 5.9% greater than advanced countries – interact nonlinearly with uncertainty to generate the observed excess volatility.

Keywords: Advanced and emerging countries; Business cycle asymmetries; Financial frictions; Recessions; Uncertainty shocks (search for similar items in EconPapers)
JEL-codes: E32 F41 F44 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:162:y:2024:i:c:s001429212300274x

DOI: 10.1016/j.euroecorev.2023.104646

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