International (spillovers in) macrofinancial linkages and the decoupling phenomenon

• Nowadays emerging countries are more resilient to external shock than in the eighties.
• Historically, emerging countries resilience to external shocks followed a “wave path”.
• Emerging economies have always been more vulnerable to credit shocks than real ones.
• The ratio of the credit shock vulnerability on the real one got its peak in 2006–10 period.

This paper contributes to the debate on the decoupling of emerging economies (EEs) from advanced economies (AEs), by measuring how the resilience of EEs to external shocks (i.e. shocks spreading from AEs) has changed over time and whether EEs are relatively more vulnerable to real or financial external shocks. A time-varying panel VAR model with factorisation of the coefficients was used to perform counterfactual experiments over a period of about 30 years for a large sample of countries. Allowing for time-varying coefficients permitted the decoupling phenomenon to be examined as a slow-moving evolution process over a long time, rather than as a structural break at a specific moment. The factorisation of coefficients allowed a large dynamic panel to be managed, with interdependences across many countries. Consequently, the experiment was more realistic, in terms of evaluating the response of EEs to shocks hitting the AEs within a global framework. The resilience of EEs has improved over time; however, this increasing resilience was discontinuous over the approximately 30-year sample period, tracing a ‘wave path’. In the whole sample period, the EEs were relatively more vulnerable to credit shocks than to real ones. This greater vulnerability increased over time and peaked in the last 5 years of the sample period.