Volatile Rates, Fragile Growth: Global Financial Risk and Productivity Dynamics
We document that rising volatility in U.S. interest rates, a key dimension of global financial risk, notably depresses the trend of economic activity in emerging market economies (EMEs) but not in advanced economies (AEs). Using a panel state-space model, we show that a one standard- deviation shock to U.S. monetary policy uncertainty permanently lowers the level of GDP in EMEs by about 25 basis points after three years, with negligible effects in AEs. We rationalize this fact in a small open economy model where firms borrow against future profits to finance innovation. Higher volatility compresses firm values, tightens collateral constraints, and endogenously slows productivity growth, especially when financial frictions are severe.
-
-
Copy CitationNils Gornemann, Eugenio I. Rojas, and Felipe Saffie, "Volatile Rates, Fragile Growth: Global Financial Risk and Productivity Dynamics," NBER Working Paper 34595 (2025), https://doi.org/10.3386/w34595.Download Citation
More from the NBER
In addition to working papers, the NBER disseminates affiliates’ latest findings through a range of free periodicals — the NBER Reporter, the NBER Digest, the Bulletin on Health, and the Bulletin on Entrepreneurship — as well as online conference reports, video lectures, and interviews.
