The Impact of US Financial Uncertainty Shocks on Emerging Market Economies: An International Credit Channel

Sangyup Choi

Open Economies Review, 2018, vol. 29, issue 1, No 5, 89-118

Abstract: 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.

Keywords: Uncertainty shocks; Emerging market economies; Credit channel; Vector Autoregressions; Portfolio choice model; Value-at-Risk constraint (search for similar items in EconPapers)
JEL-codes: E30 F30 G10 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

Downloads: (external link)
http://link.springer.com/10.1007/s11079-017-9471-y Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: The Impact of US Financial Uncertainty Shocks on Emerging Market Economies: An International Credit Channel (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:openec:v:29:y:2018:i:1:d:10.1007_s11079-017-9471-y

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/11079/PS2

DOI: 10.1007/s11079-017-9471-y

Access Statistics for this article

Open Economies Review is currently edited by G.S. Tavlas

More articles in Open Economies Review from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().