Description

In this paper we estimate the impact of global uncertainty shocks –identified as sudden jumps in U.S. stock market volatility– on certain sectors of the Chilean economy. Using a reduced-form VAR approach, we estimate that uncertainty shocks generate a fall in GDP of 1.7% with respect to trend, and a fall in domestic demand of 2.2% within three quarters. On the supply side, the sector in which activity falls most is construction (-4.0%), while the largest drops in demand occur in durable goods consumption (-7.0%) and investment in plant and equipment (-10.0%). These results are broadly consistent with the literature on investment under uncertainty with partial irreversibility, and provide preliminary evidence about possible mechanisms through which global uncertainty affects emerging markets, with corresponding implications for stabilization policy.