time：2024-10-01
Yu-Fan Huang, Wenting Liao, Taining Wang
This paper investigates how U.S. financial uncertainty spills over to the global economy through the international credit channel and demonstrates that this effect is significantly asymmetric, depending on market participants' expectations. During periods of pessimism regarding future economic conditions, U.S. financial uncertainty shocks lead to a substantial tightening of both domestic and international credit conditions, causing a severe global economic slowdown. The impact is more pronounced on the left tail of the distribution than on the right, increasing the likelihood of negative global output growth. Conversely, in optimistic periods, U.S. financial uncertainty exerts a relatively modest effect on international credit conditions and the global economy but significantly increases economic uncertainty.
To analyze this mechanism, the study constructs a proxy for market expectations based on financial market volatility and applies a threshold vector autoregression (TVAR) model to examine the cross-border transmission of financial uncertainty. The findings indicate that, in pessimistic periods, U.S. financial uncertainty shocks lead to a much sharper tightening of global financial conditions, amplifying economic downturns and increasing global financial uncertainty. This provides strong evidence for an asymmetric international credit channel, where market participants' expectations modulate the transmission of financial uncertainty across borders.
Furthermore, to assess the impact of financial uncertainty on tail risks of global economic growth, the study employs a cross-country panel model with skew-normally distributed errors. The results reveal that U.S. financial uncertainty has regime-dependent spillover effects on the conditional distribution of future global output growth. In pessimistic times, rising financial uncertainty disproportionately drags down the lower percentiles of economic growth while leaving the upper percentiles largely unchanged, leading to a left-skewed distribution. In contrast, during optimistic periods, heightened financial uncertainty stretches the conditional distribution, simultaneously reducing lower percentiles and increasing upper percentiles. By comparing the late 1990s with the 2008-2009 global financial crisis, the study further validates this asymmetric transmission mechanism.
Overall, this research highlights that the spillover effects of U.S. financial uncertainty are shaped by prevailing market sentiment and transmitted globally through the international credit channel, with a stronger impact during pessimistic periods. Additionally, the study reveals that financial uncertainty has nonlinear effects on the tail risks of global economic growth, shedding light on how financial uncertainty shapes the landscape of global economic uncertainty.