Description

A recent strand of research proposes that sudden jumps in uncertainty generate rapid drops and recoveries in real macroeconomic variab les that drive the busin ess cycle. Using an empirical model, we find substantial heterogene ity in the reactions to these shocks across countries. In comparison to the U.S. and ot her developed countries , emerging economies suffer much more severe falls in invest ment and private consumption following an exogenous uncertainty shock, take significantly longer to recover, and do not experience a subsequent overshoot in activity. We provide ev idence that the dynamics of investment and consumption are correlated with the depth of financial markets. Once we control for the potential role of credit constr aints, we find that investment and consumption dynamics in emerging economies are similar to those in deve loped economies. In this context, monetary and fiscal policy actions that alleviate the im pact of credit constr aints facing firms and households may reduce the impact of un certainty shocks in these economies.