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

Nils Gornemann, Eugenio Rojas () and Felipe Saffie

No 1434, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

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.

Keywords: Emerging market economies (EME); Dynamic stochastic general equilibrium (DSGE) models; Monetary policy; Productivity; Volatility (search for similar items in EconPapers)
JEL-codes: F32 F41 G15 O16 (search for similar items in EconPapers)
Pages: 65 p.
Date: 2026-03-20
New Economics Papers: this item is included in nep-dge
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Working Paper: Volatile Rates, Fragile Growth: Global Financial Risk and Productivity Dynamics (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:102989

DOI: 10.17016/IFDP.2026.1434

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