Uncertainty Shocks, Financial Frictions and Business Cycle Asymmetries Across Countries
77 Pages Posted: 28 Apr 2022
Abstract
I show that uncertainty shocks trigger sharper declines in consumption and investment -- and a sharper increase in trade balances -- in emerging countries relative to advanced countries during recessions. Using an open-economy model – estimated on a set of advanced and emerging countries – I demonstrate that these stylized facts can be explained by a novel nonlinear interaction between uncertainty and financial frictions. In particular, the results imply that during recessions elevated borrowing costs in emerging countries -- about 5.5% greater than advanced countries -- interact nonlinearly with uncertainty to generate the observed excess volatility.
Keywords: Advanced and Emerging Countries, Business Cycle Asymmetries, Financial Frictions, Recessions, Uncertainty Shocks
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