Exploring the international linkages of the euro area: a global VAR analysis

Abstract

SUMMARYThis paper presents a quarterly global model combining individual country vector error-correcting models in which the domestic variables are related to the country-specific foreign variables. The global VAR (GVAR) model is estimated for 26 countries, the euro area being treated as a single economy, over the period . It advances research in this area in a number of directions. In particular, it provides a theoretical framework where the GVAR is derived as an approximation to a global unobserved common factor model. Using average pair-wise cross-section error correlations, the GVAR approach is shown to be quite effective in dealing with the common factor interdependencies and international co-movements of business cycles. It develops a sieve bootstrap procedure for simulation of the GVAR as a whole, which is then used in testing the structural stability of the parameters, and for establishing bootstrap confidence bounds for the impulse responses. Finally, in addition to generalized impulse responses, the current paper considers the use of the GVAR for 'structural' impulse response analysis with focus on external shocks for the euro area economy, particularly in response to shocks to the US.

Bubbles and Crises: The Role of House Prices and Credit

“…In particular, we have followed the GVAR literature (see e.g. Pesaran et al (2004), Dees et al (2007a) and Dees et al (2007b)) and used time-varying trade weights. This entails that the exposure of a given country to other countries at a particular point in time depends on trade exposures (details are described in Appendix C).…”

“…as a weighted average of this variable in all other areas. We follow Pesaran et al (2004), Dees et al (2007a) and Dees et al (2007b) to define the weighting matrixes. In particular, we use time-varying trade weights based on import and export shares.…”

“…Inspired by the GVAR literature (see e.g. Pesaran et al (2004), Dees et al (2007a) and Dees et al (2007b)), the global variables are constructed using time-varying trade weights. Our results demonstrate that global developments in house prices were of great importance in the build-up to the recent global financial crisis, while it had less influence prior to earlier crisis episodes.…”

Yields on Sovereign Debt, Fragmentation and Monetary Policy Transmission in the Euro Area: A GVAR Approach

“…first by setting up a GVAR framework based on Pesaran et al (2004) and Dees et al (2007). This framework allows consistent modeling of international interdependencies and transmission channels across countries and the evaluation of different economic policies in counterfactual analyses.…”

Interconnections between Eurozone and US Booms and Busts Using a Bayesian Panel Markov-Switching VAR Mode

“…The more recent approaches have focused on two issues: the estimation of international cycles focusing on the nature of the co-movements using relatively large dimensional data sets; and the introduction of country and time heterogeneity in multi-country vector autoregressive models. The first issue has been considered by Hallin and Liska (2008), Pesaran et al (2004), and Dees et al (2007) and the second by and . Hallin and Liska (2008) extend the generalized dynamic factor model proposed by Forni et al (2000Forni et al ( , 2001) to a panel of time series with a block structure, where the blocks are represented by countries.…”