International macroeconomic dynamics: A factor vector autoregressive approach

Abstract

In this paper international comovements among a set of key real and nominal macroeconomic variables for the G-7 countries have been investigated for the 1980-2005 period, using a Factor Vector Autoregressive approach. We present evidence that comovements in macroeconomic variables do not concern only real activity, but are an important feature also of stock market returns, in ‡ation rates, interest rates and, to a smaller extent, monetary aggregates. Both common sources of shocks and similar transmission mechanisms explain international comovements, with the only exception of Japan, where the idiosyncratic features seem to dominate. Finally, concerning the origin of global shocks, evidence of both global supply-side and demand-side disturbances is found.

Business cycle comovement in the G-7: common shocks or common transmission mechanisms?

“…Moreover, Stock and Watson (2005b) point to the existence of a common euro zone factor for the 1984-2003 period. Finally, Bagliano and Morana (2006b) have found that regional similarities seems to characterize more the real side of the economy than the nominal side.…”

“…For instance, Bagliano and Morana (2006b) found that the global demand and supply shocks tend to provide a similar contribution to output ‡uctuations for Canada and the US and in the long term only for the euro area, while the aggregate supply shock has a dominant role for all other real and nominal variables in all economies. 3 Evidence of a similar transmission mechanism of global shocks for the G-7 countries, particularly for the US, the UK, Canada and the euro area, is also found by Bagliano and Morana (2006b) and Canova and de Nicolò (2003), while the more idiosyncratic behavior found for Japan is fully coherent with the structural change associated with the long stagnation su¤ered from this latter country over the 1990s. 4 Finally, common economic ‡uctuations may also be related to the spillover of domestic shocks among G-7 countries.…”

“…In fact, while for the 1960s and 1970s the global shocks could be related to US monetary policy, the oil price and the price of industrial materials (Stock and Watson, 2003), in more recent periods the global shocks could be linked to productivity changes and monetary policy disturbances (Kose, Otrok and Whiteman, 2005). Similarly, Bagliano and Morana (2006b) found a key role for global demand and productivity shocks since the 1980s for the G-7 countries, while global stock market and oil price shocks have been less important to explain macroeconomic ‡uctu-ations. Interestingly, the relative importance of demand and supply shocks would not be the same among G-7 countries.…”

“…Moreover, the multi-country framework allows for a more accurate analysis of spillover e¤ects than two-country macroeconometric models. 5 Hence, the key advantage of the approach proposed in this paper is in the accurate estimation of domestic shocks, which is carried out conditionally on a large information sets composed of nominal and real variables for …ve regions: the US, Japan, the Euro-12 area, the UK and Canada. As discussed in detail below, the macroeconometric model (estimated over the 1980-2005 period) is composed of 39 equations: the …rst 35 refer to the seven endogenous variables (real output growth, in ‡ation, the nominal short-and longterm interest rates, nominal money growth, real exchange rate returns, and real stock returns) for the …ve regions, and the latter 4 refer to the "global factors", driving comovements across countries.…”

Factor Analysis of a Large DSGE Model

“…This interpretation is then exploited to carry out structural factor analysis. 1 Although the statistical workings of large factor models and of their forecasting and structural applications are well understood by now, their macroeconomic content remains largely unexplored. Usually, the existence of such a macroeconomic content is simply a matter of assumption or believe.…”