Sector Heterogeneity and Credit Market Imperfections in Emerging Markets
Sector Heterogeneity and Credit Market Imperfections in Emerging Markets
Sector Heterogeneity and Credit Market Imperfections in Emerging Markets
The empirical results show, first, that one percent increase in the domestic
interest rate leads to a 7% decrease in emerging markets’ GDP. Second, non-
tradable and tradable activities respond asymmetrically to domestic interest
rate shocks. One percent increase in the domestic interest rate induces a 6.5%
decline in non-tradable output, while it has nonsignificant effect on tradable
activities. Notably, these results are driven by the increase in the country risk
premium. Third, the variance decomposition analysis demonstrates that
domestic interest rate shocks have a substantial impact on emerging markets’
business cycles, as they account for 14% of GDP fluctuations within business
cycle frequency (20 quarters). Fourth, the variance decomposition analysis also
reveals asymmetries in the source of fluctuations between tradable and non-
tradable activities, as domestic interest rate shocks account for larger declines
in non-tradable output.Fifth, these distinctive features observed in emerging
markets following interest rate shocks are absent in developed small open
economies. Finally, I construct a database on local credit and output at a
quarterly frequency for tradable and non-tradable activities for emerging
markets, and estimate a dynamic heterogeneous panel at sector level.
Empirical results show that non-tradable activities are more reliant on the
domestic credit market and, hence, more likely to be affected by local financial
imperfections. This paper is complementary to Tornell and Westermann (2005)
insofar as I provide a more comprehensive analysis of the relationship between
domestic credit conditions and sectorial output growth in emerging markets.
The standard small open economy (SOE) model states that increases in the
borrowing cost affect the capital-intensive tradable sector the most. She use a
SOE model with international borrowing to show that the presence of
heterogeneous access to external finance can explain the empirical patterns
observed in the data. Open economy model where the economy is composed by
two goods: tradable and non-tradable, and two factors of production: capital
and labor. Assume that the tradable and non-tradable sectors are perfectly
competitive, and the representative firm operates with a Cobb-Douglas
function: Yit=KtiiLti1-I, where i=Tradable, Non-tradable. The tradable sector is
capital-intensive and the non-tradable sector is labor-intensive.
To assess the robustness of the results, she conducts two further empirical
exercises. First analyze the sensitivity of the results for different classifications
of non-tradable activities, and test next whether results are robust to different
specifications of VAR.
Non-Tradable Activities
Conclusion