Abstract
We study the spillover effects of fluctuations in US uncertainty. Using monthly panel data from fifteen major emerging market economies (EMEs), we show that an unanticipated rise in US stock market uncertaintyhas negative effects on their stock prices and exchange rate, increases long-term interest rate spreads, and leads to capital outflows. These negative financial effects transmit to the real economy as a drop in output, a rise in consumer prices, and a rise in net exports from these countries. The negative effects on output, exchange rates, and stock prices are weaker, but the effects on capital flows and trade flows stronger, for South American countries compared to other EMEs. We present a small open economy (SOE) model that can account for our empirical findings. A negative external shock that increases the interest rate spread faced by the SOE produces responses of macroeconomic and financial variables that are consistent with our estimated responses. The model can also account for the heterogeneity in responses across countries depending on the endogenous response of the monetary policy instrument to the increase in interest
rate spread.
The paper is co-authored with Saroj Bhattarai and Woong Yong Park.
Bio
Arpita Chatterjee joined University of New South Wales in 2010, after completing her PhD in economics from Princeton University. She is particularly interested in how national economic policies and outcomes are shaped by international factors in an increasingly globalized world economy, and how these domestic policies and institutions, in turn, shape globalization. Also, understanding various economic and policy implications of the Great Recession is an important part of her research agenda.