Unemployment Dynamics in Emerging Countries: Global Financial Risk and Interest Rates

Abstract

This paper quantifies the impact of three key external shocks -- external demand, interest rate, and uncertainty shocks -- on emerging market economies (EMEs). We find that external shocks have a sizeable impact on macroeconomic fluctuations in EMEs and that a considerable fraction of this impact is through the domestic stock market. A decrease in external demand and an increase in external interest rate and uncertainty lead to a higher unemployment rate, lower stock market return, and a depreciation of the domestic currency. The EMEs' monetary policy actively responds to external shocks and dampens their impact on domestic activity.