Contents

Which external shock matters in small open economies? Global risk aversion vs. US economic policy uncertainty

Kim, Youngju / Lim, Hyunjoon / Sohn, Wook

Abstract

We investigate the roles of global risk aversion and US economic policy uncertainty in contributing to financial and macroeconomic fluctuations in small open economies (SOEs). We use a panel of forty SOEs that includes both advanced economies (AEs) and emerging markets economies (EMEs) to find that SOEs' financial and economic activities exhibit relatively short-lived and robust reactions to risk aversion shocks, while responding smoothly and persistently to US policy uncertainty shocks, consistent with Bloom et al. (2018). A novel finding of this paper is that the responses of AEs and EMEs are asymmetric: AEs react more strongly to US policy uncertainty shocks while EMEs are more sensitive to risk aversion shocks. These results suggest that the channels through which each shock is transmitted to SOEs may vary.

Issue Date
2020-06
Publisher
ELSEVIER
Keywords Plus
MONETARY-POLICY; MACROECONOMIC FLUCTUATIONS; FINANCIAL CONDITIONS; IMPACT; RATES
Keywords(Author)
Risk aversion; Economic policy uncertainty; Spillovers; Small open economies
DOI
10.1016/j.japwor.2020.101011
Journal Title
JAPAN AND THE WORLD ECONOMY
ISSN
0922-1425
Language
English
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