Does US financial uncertainty spill over through the (asymmetric) international credit channel? The role of market expectations

Abstract

We show that the international credit channel is an important channel through which US financial uncertainty spills over internationally. Moreover, we find the asymmetric responses of domestic and international credit conditions to US financial uncertainty shocks, contingent upon market participants' expectations. During periods of pessimism regarding future economic conditions, the impact of US financial uncertainty on both domestic and international credit conditions intensifies significantly, leading to a severe global economic slowdown. Elevated US financial uncertainty disproportionately affects the left tails of the distribution more than the right tails, heightening the likelihood of negative global output growth. Conversely, in times of optimism, heightened US financial uncertainty exerts modest effects on international credit conditions and global economic conditions. Yet it stretches the conditional distribution substantially, signaling an increasingly uncertain future.