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The Impact of US Financial Uncertainty Shocks on Emerging Market Economies: An International Credit Channel

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  • Sangyup Choi

    (Yonsei University)

Abstract
I document that US nancial uncertainty shocks, measured by an increase in VIX, have a substantial impact on the output of emerging market economies (EMEs) without a material impact on US output during the last two decades. To understand this puzzling phenomenon, I propose a credit channel as a propagation mechanism of US nancial uncertainty shocks to EMEs. I augment a boom-bust cycle model of EMEs by Schneider and Tornell [2004] with a portfolio choice model of constrained international investors. As international investors pull their money from EMEs|to satisfy their Value-at-Risk constraints|in response to nancial uncertainty shocks, borrowing costs increase and domestic credit contracts. Higher borrowing costs and a decline in domestic credit, in turn, lead to a fall in investment in the non-tradable sector that causes a real depreciation via currency mismatch prevalent in EMEs and a decline in total output through sectoral linkages. The empirical regularity obtained by estimating structural VARs of 18 EMEs is consistent with the prediction of the model.

Suggested Citation

  • Sangyup Choi, 2017. "The Impact of US Financial Uncertainty Shocks on Emerging Market Economies: An International Credit Channel," Working papers 2017rwp-113, Yonsei University, Yonsei Economics Research Institute.
    • Handle: RePEc:yon:wpaper:2017rwp-113
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    References listed on IDEAS

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    More about this item

    Keywords

    Uncertainty shocks; Emerging market economies; Credit channel; Vector Autoregressions; Portfolio choice model; Value-at-Risk constraint;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • F30 - International Economics - - International Finance - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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