The euro crisis and Swedish GDP growth – a study of spillovers

Abstract

In this paper, a Bayesian VAR model is used to study the effects of euro area shocks on GDP growth in the small open economy of Sweden. A novel feature is that the new policy uncertainty index of Baker et al. (2013) is introduced in the model. The model behaves well in terms of reasonable impulse response functions. The specific effects of the euro crisis are investigated through a historical decomposition which shows that shocks to euro area GDP growth have been a reasonably important factor for Swedish GDP growth, supporting it during 2010 and holding it back thereafter. Generally, shocks to policy uncertainty have held back Swedish GDP growth during the euro crises.

Effects of US policy uncertainty on Swedish GDP growth

“…Results from these estimations show that European policy uncertainty affects Swedish GDP growth in a negative way. This finding does not come as a complete surprise since it has been shown previously that the European policy uncertainty index affects the Swedish economy (Österholm and Stockhammar, 2014). Second, we replaced Swedish GDP growth in the BVAR with seven variables with goods exports to four major recipients of Swedish goods exports -namely the United States, Norway, Germany and the United Kingdom -thereby hoping to be able to draw conclusions concerning the channels through which US policy uncertainty works.…”

“…2 In light of increasing uncertainty, households tend to increase their saving and businesses to reduce their investment; see, for example, Leland (1968), Bernanke (1983), Ferderer (1993) and Bloom (2009). verse literature on "spillovers" between countries and/or regions; see, for example, Cromwell (1992), Pesaran et al (2004), Galvão et al (2007), Österholm and Zettelmeyer (2008), Bagliano and Morana (2010), Erten (2012) and Österholm and Stockhammar (2014). Relying on the policy uncertainty index of Baker et al (2013) for our analysis, our study is related to that of the International Monetary Fund (2013).…”

The effects of economic policy uncertainty on European economies: evidence from a TVP-FAVAR

“…1 The index shows that EPU has increased in Europe during the financial crisis and even more during the sovereign debt crisis and until now has not returned to the pre-crisis level. Recently, many empirical studies, e.g., Österholm and Stockhammar (2014) or Scheffel (2015), used this index to quantify the effect of EPU on the economy.…”

“…However, the majority of studies investigating the effect of EPU on the economy use a SVAR with only a small set of variables. Examples include Bloom (2009), Baker et al (2012), Colombo (2013), Benati (2013), Österholm and Stockhammar (2014), Alam (2015) and Caldara et al (2016). To consider a larger information set a FAVAR model suggested by Bernanke et al (2005) is a useful choice.…”