Emerging market responses to external shocks: A cross-country analysis

The size of emerging markets, as well as their economic and financial interconnectedness is increasing over time, making it important to understand their interdependencies with other economies. We develop and apply a new methodology to analyse international macroeconomic and financial shock transmission from 1978 to 2016 for 14 economies, focusing on the heterogeneity of emerging market responses across countries and over time. We find substantial time variation in the effects of these shocks with GDP, investment and consumption becoming more sensitive to global financial conditions over time. The higher perceived risk of emerging markets when global financial conditions deteriorate is reflected on their asset prices and their borrowing costs. However, a US policy rate shock does not have the expected contractionary effect, as this is partially taken over by the global financial risk shock we included. Our findings vary across countries and we attribute this to differences in country characteristics.