Measuring the Effects of U.S. Uncertainty and Monetary Conditions on EMEs’ Macroeconomic Dynamics
44 Pages Posted: 6 May 2020
Date Written: April 1, 2020
We explore empirically the transmission of U.S. financial and macroeconomic uncertainty to emerging market economies (EMEs). We start by assuming that there are crucial differences between volatility and uncertainty, and between the latter and its shocks. With the help of Bayesian vector auto-regressions, we first identify two measures of U.S. uncertainty shocks, which appear to explain the dynamics of output developments better than conventional volatility measures. Next, we find evidence that adverse shocks to U.S. aggregate uncertainty are associated with marked contractions in some EMEs’ business cycles. However, we detect significant cross-country heterogeneity in the responses of EMEs’ business cycles to U.S uncertainty shocks. We also find generalized declines in stock market values, which supports the so-called Global Financial Cycle hypothesis.
Keywords: Uncertainty, Monetary Policy, Asset Prices, Emerging Markets
JEL Classification: C11, C32, E44, E52, E58, F36
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