Uncertainty Shocks, Financial Frictions and Business Cycle Asymmetries Across Countries

77 Pages Posted: 28 Apr 2022

See all articles by Pratiti Chatterjee

Pratiti Chatterjee

University of New South Wales (UNSW)

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

Suggested Citation

Chatterjee, Pratiti, Uncertainty Shocks, Financial Frictions and Business Cycle Asymmetries Across Countries. Available at SSRN: https://ssrn.com/abstract=4093728 or http://dx.doi.org/10.2139/ssrn.4093728

Pratiti Chatterjee (Contact Author)

University of New South Wales (UNSW) ( email )

Disability Innovation Institute
UNSW, Randwick
Sydney, 2052
Australia

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