How important are spillovers from major emerging markets?

• Date: 01 March 2020
• Author: Franziska L. Ohnsorge,Raju Huidrom,M. Ayhan Kose,Hideaki Matsuoka
• DOI: http://doi.org/10.1111/infi.12350
• Published date: 01 March 2020

International Finance. 2020;23:47–63. wileyonlinelibrary.com/journal/infi © 2019 John Wiley & Sons Ltd

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47

DOI: 10.1111/infi.12350

ORIGINAL ARTICLE

How important are spillovers from major

emerging markets?

Raju Huidrom

1

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M. Ayhan Kose

2,3,4,5

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Hideaki Matsuoka

2

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Franziska L. Ohnsorge

2,5

1

European Department, International

Monetary Fund, Washington, District of

Columbia

2

Prospects Group, World Bank,

Washington, District of Columbia

3

Brookings Institution, Washington,

District of Columbia

4

CEPR, London, the United Kingdom

5

CAMA, Crawford School of Public

Policy, The Australian National

University, Canberra, Australia

Correspondence

M. Ayhan Kose, Prospects Group,

World Bank, 1818 H street NW,

Washington, DC 20433.

Email: akose@worldbank.org

Abstract

The seven largest emerging market economies—China,

India, Brazil, Russia, Mexico, Indonesia, and Turkey—

constituted more than one‐quarter of global output

and more than half of global output growth during

2010–2015. These emerging markets, which we call

EM7, are also closely integrated with other countries,

especially with other emerging and frontier markets

(FMs). Given their size and integration, growth in EM7

could have significant cross‐border spillovers. We

provide empirical estimates of these spillovers using a

Bayesian vector autoregression model. We report three

main results. First, spillovers from EM7 are sizeable: a 1

percentage point increase in EM7 growth is associated

with an 0.9 percentage point increase in growth in other

emerging and FMs and a 0.6 percentage point increase

in world growth at the end of 3 years. Second, sizeable as

they are, spillovers from EM7 are still smaller than those

from G7 countries (group of seven of advanced

economies). Specifically, growth in other emerging and

FMs, and the global economy would increase by one‐

half to three times more due to a similarly sized increase

in G7 growth. Third, among the EM7, spillovers from

China are the largest and permeate globally.

KEYWORDS

business cycles, China, EM7, external shocks, G7, spillovers

JEL CLASSIFICATION

E32; F20; F42

1

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INTRODUCTION

Over the last two decades, emerging market (EM) economies have played an increasingly

important role in the global economy. They constituted more than a quarter of global output

and more than half of global output growth during 2010–2015, compared with just about one‐

tenth and one‐fifth, respectively in the 1990s (Figure 1). Their growing size has been

accompanied by their rapid integration into global trade and finance networks. The seven

largest EM economies—China, Russia, India, Brazil, Turkey, Mexico, and Indonesia—

constitute about 80% of total EM output. This group, which we label as EM7, akin to G7 (the

group of seven major advanced economies), has been the main source of growth in EMs and

their integration into the global economy.

1

In particular, the EM7 economies have strong trade

and financial ties with other EM and frontier market (FM), especially with those in their

respective neighborhoods.

2

Given their size and integration, growth in EM7 could have

significant spillovers to other economies in the world.

3

The objective of this paper is to empirically assess the size of spillovers from EM7 economies.

Previous studies on spillovers mostly focused on those originating from advanced economies,

including the G7, while spillovers from EMs have received less attention.

4

This reflects the

historical role of the G7 economies in the world economy. However, given the changing

economic landscape, understanding spillovers from the EM7 has become increasingly

important.

The contribution of this paper to the literature is twofold. First, this paper presents the

first comprehensive analysis of global spillovers effects from the EM7. Existing work on

spillovers from the EM7 is limited, tends to focus on spillovers from individual EM7

economies, and is often conducted with a regional perspective. The literature has not yet

presented a systematic analysis comparing individual EM7 economies as sources of

spillovers and comparing spillovers from the EM7 to those originating from the G7. Second,

we employ a larger and more diverse sample of countries than much of the existing

literature (29 economies).

An extensive literature employs dynamic stochastic general equilibrium (DSGE) models to

quantify the role of specific shocks in driving business cycles. Some studies have examined the

role of domestic and foreign shocks using multicountry DSGE models mostly in the context of

advanced economies (e.g., Ambler, Cardia, & Zimmermann, 2002; De Walque, Smets, &

Wouters, 2005). While these are useful for understanding spillovers among advanced

FIGURE 1 Global importance of EM: (a) EM share of global output (b) EM contribution to global growth.

AM, advanced markets; EM, emerging markets; EM7, Brazil, China, India, Indonesia, Mexico, Russia, and

Turkey; G7, Canada, France, Germany, Italy, Japan, United Kingdom, and United States [Color figure can be

viewed at wileyonlinelibrary.com]

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HUIDROM ET AL.