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Sector heterogeneity and credit market imperfections in emerging markets

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  • Varela, Liliana

Abstract

This paper shows that the impact of country interest rate shocks on emerging markets' economic activities can be associated with credit market imperfections affecting principally non-tradable activities. I present novel evidence documenting that tradable and non-tradable activities respond asymmetrically to changes in credit conditions in emerging markets. I show that country interest rate shocks are amplified through non-tradable activities, and that local credit substantially explains their output growth. Unlike the non-tradable sector, tradable activities are not significantly affected by changes in local credit conditions. To rationalize these findings, I introduce a small open economy model with heterogeneous access to international borrowing that accounts for the asymmetric response of tradable and non-tradable activities.

Suggested Citation

  • Varela, Liliana, 2017. "Sector heterogeneity and credit market imperfections in emerging markets," LSE Research Online Documents on Economics 102061, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:102061
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    Cited by:

    1. Pozo, Jorge, 2023. "Sectoral credit reallocation: An excessive bank risk-taking explanation," Emerging Markets Review, Elsevier, vol. 54(C).
    2. Juliana Salomao & Liliana Varela, 2022. "Exchange Rate Exposure and Firm Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(1), pages 481-514.
    3. Senderski, Marcin, 2011. "Justifiable thrift or feverish animal spirits: What stirred the corporate credit crunch in Poland?," MPRA Paper 56613, University Library of Munich, Germany.
    4. Alan Finkelstein-Shapiro & Andrés González Gómez, 2015. "Macroprudential Policy and Labor Market Dynamics in Latin America," IDB Publications (Working Papers) 88738, Inter-American Development Bank.

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    More about this item

    Keywords

    emerging markets; financial frictions; interest rate shocks;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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