Results
Board of Governors of the Federal Reserve System
03/20/2026 | Press release | Distributed by Public on 03/20/2026 08:47
Volatile Rates, Fragile Growth: Global Financial Risk and Productivity Dynamics
March 2026
Volatile Rates, Fragile Growth: Global Financial Risk and Productivity Dynamics
Nils Gornemann, Eugenio Rojas, Felipe Saffie
Abstract:
Does global financial risk affect long-run growth? Using a panel state-space model for emerging and advanced small open economies, we measure the effects of U.S. monetary policy uncertainty shocks. A one-standard-deviation shock lowers the level of the stochastic trend in emerging markets by at least 25 basis points after three years, with little effect in advanced economies. A small open economy model with growth through innovation and occasionally binding borrowing constraints explains this heterogeneity: higher interest-rate volatility depresses valuations, tightens collateral constraints, and slows innovation in equilibrium. A novel interaction between the occasionally binding constraint and stochastic volatility is key for our results.
Keywords: Endogenous Growth, Stochastic Interest Rate Volatility, Financial Frictions, Long- Term Productivity Trends, Global Financial Risk Cycle
DOI: https://doi.org/10.17016/IFDP.2026.1434
PDF: Full Paper
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