Abstract
In this paper, we study the impact of sudden rises in global financial uncertainty on small open economies. To this end, we extract a global factor from the realised volatilities of about 1000 risky asset returns from around the world. We then analyse how shocks to this factor affect economic activity in 44 advanced and emerging small open economies by estimating local projections in a panel regression framework. We find that shocks increasing global financial uncertainty have adverse consequences on output, trade and unemployment, while their impact on nominal variables is more heterogeneous across countries. Furthermore, the effects are more severe in countries with a higher degree of trade or financial openness, higher levels of vulnerabilities, weaker institutions or during economic downturns.
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