Which External Shock Matters in Small Open Economies? US Economic Policy Uncertainty vs. Global Risk Aversion
47 Pages Posted: 11 Oct 2018
Date Written: October 2, 2018
We investigate the relative roles of US economic policy uncertainty andglobal 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
JEL Classification: F21, F32, F42
Suggested Citation: Suggested Citation