Global Spillover E ects of US Uncertainty ∗

We study spillover e ects of uctuations in US uncertainty. Using monthly panel data from fteen major emerging market economies (EMEs), we show that an unanticipated rise in US stock market uncertainty has negative e ects on their stock prices and exchange rate, increases long-term interest rate spreads, and leads to capital out ows. These negative nancial e ects transmit to the real economy as a drop in output, a rise in consumer prices, and a rise in net exports from these countries. The negative e ects on output, exchange rates, and stock prices are weaker, but the e ects on capital ows and trade ows stronger, for South American countries compared to other EMEs. We present a small open economy (SOE) model that can account for our empirical ndings. A negative external shock that increases the interest rate spread faced by the SOE produces responses of macroeconomic and nancial variables that are consistent with our estimated responses. The model also provides a possible explanation for the heterogeneity in macroeconomic and nancial responses across countries based on the di erential response of the monetary policy instrument to the increase in interest rate spread.