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

Nils Gornemann, Eugenio I. Rojas and Felipe Saffie

No 34595, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We document that rising volatility in U.S. interest rates, a key dimension of global financial risk, notably depresses the trend of economic activity in emerging market economies (EMEs) but not in advanced economies (AEs). Using a panel state-space model, we show that a one standard- deviation shock to U.S. monetary policy uncertainty permanently lowers the level of GDP in EMEs by about 25 basis points after three years, with negligible effects in AEs. We rationalize this fact in a small open economy model where firms borrow against future profits to finance innovation. Higher volatility compresses firm values, tightens collateral constraints, and endogenously slows productivity growth, especially when financial frictions are severe.

JEL-codes: F32 F41 G15 O16 (search for similar items in EconPapers)
Date: 2025-12
Note: EFG IFM PR
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