The spillover effect of the US uncertainty on emerging economies: a panel VAR approach

ABSTRACT

The article quantifies the spillover effects of the United States’ (US) uncertainty shocks on emerging economies, using a panel VAR model. We find that the US uncertainty shocks are the risks, and hence drop the capital inflow, investment, consumption, export and output of emerging economies. This also induces a depreciation of emerging market currencies. As a result, our model predicts a fall in short-term interest rate of emerging economies to react against the US uncertainty shocks. Our findings partly help explain the slow recovery of the world economy after the 2008–2009 global financial crisis.

KEYWORDS:

• Emerging economies
• panel VAR
• US uncertainty
• spillover effects
• economic policy uncertainty

JEL CLASSIFICATION:

• C33
• E20
• E32
• F02

Acknowledgements

We thank Baak Saang Joon, the anonymous referee, Hsu Chen Min (the discussant) and the participants at “Korea and World Economy conference - 2017” for valuable comments. Any mistakes made are those of the author alone.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ A complete survey of the uncertainty and its effect on the economy is outlined in Bloom (2017).

² See Baker et al. (2016) for further discussion of the US EPU methodology.

³ The details of all the countries are provided in Appendix A.

⁴ The details of definitions, measurements and explanations of all the variables are provided in Appendix B.

⁵ Our results are robust to: (i) using another uncertainty index (VOL), measured by the volatility index of 30-day option on the S&P 100 stock index (VXO), (ii) using different orders of the variables. The robustness checks are provided in Appendix C and Appendix D.