Sector heterogeneity and credit market imperfections in emerging markets

Liliana Varela

Journal of International Money and Finance, 2017, vol. 70, issue C, 433-451

Abstract: This paper shows that the impact of country interest rate shocks on emerging markets' economic activities can be associated with credit market imperfections affecting principally non-tradable activities. I present novel evidence documenting that tradable and non-tradable activities respond asymmetrically to changes in credit conditions in emerging markets. I show that country interest rate shocks are amplified through non-tradable activities, and that local credit substantially explains their output growth. Unlike the non-tradable sector, tradable activities are not significantly affected by changes in local credit conditions. To rationalize these findings, I introduce a small open economy model with heterogeneous access to international borrowing that accounts for the asymmetric response of tradable and non-tradable activities.

Keywords: Financial frictions; Interest rate shocks; Emerging markets (search for similar items in EconPapers)
JEL-codes: E44 F34 F41 F43 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (5)

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Working Paper: Sector heterogeneity and credit market imperfections in emerging markets (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:70:y:2017:i:c:p:433-451

DOI: 10.1016/j.jimonfin.2016.09.006

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