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Which External Shock Matters in Small Open Economies? US Economic Policy Uncertainty vs. Global Risk Aversion

Youngju Kim () and Hyunjoon Lim ()
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Youngju Kim: Economic Research Institute, The Bank of Korea
Hyunjoon Lim: Economic Research Institute, The Bank of Korea

No 2018-29, Working Papers from Economic Research Institute, Bank of Korea

Abstract: We investigate the relative roles of US economic policy uncertainty and global risk aversion in contributing to financial and macroeconomic fluctuations in small open economies (SOEs) using a panel of forty SOEs that includes both advanced economies (AEs) and emerging markets economies (EMEs). We find that SOEs¡¯ financial and real economic activities respond smoothly and persistently to US policy uncertainty shocks, consistent with Bloom et al. (2018), while exhibiting relatively short-lived and robust reactions to US risk aversion shocks. A novel finding of this paper is that the responses of AEs and EMEs are asymmetric: AEs react more strongly to US policy uncertainty shocks while EMEs are more sensitive to risk aversion shocks. These results suggest that the channels through which each shock is transmitted to SOEs may vary.

Keywords: Economic Policy Uncertainty; Risk Aversion; Spillovers; Small Open Economies (search for similar items in EconPapers)
JEL-codes: F21 F32 F42 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2018-10-02
New Economics Papers: this item is included in nep-opm and nep-upt
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