Together in bad times? Connectedness and spillovers in recession and boom

Abstract

Is connectedness across countries dependent on the state of the economy? We answer this question by applying the Diebold‐Yilmaz index in a non‐linear framework. Via a Threshold VAR model, we measure the connectedness of industrial production, inflation and financial variables for seven advanced economies. We find that global connectedness is sizable and business cycle dependent. Specifically, our results suggest that higher values are recorded during recessions. Financial and nominal connectedness display different dynamics relative to the connectedness in industrial production. We also show that negative shocks cause a bigger increase in global connectedness compared to their positive counterparts. In addition, while Europe appears to be vulnerable to shocks originated in USA and Japan, the US is unaffected by shocks occurring elsewhere. Results are robust to an alternative state‐dependent modelling of the parameters and our model fit outperforms both the linear VAR and the Smooth Transition VAR.

Cross-Country Connectedness in Inflation and Unemployment: Measurement and Macroeconomic Consequences

“…2 Another novelty is the use of monthly data that, in terms of the standards of macroeconomic analysis, can be considered as high-frequency data. Although the use of such data is uncommon in related literature, Miescu (2019) is an exception to which this paper adds. The use of monthly data on CPI inflation and the unemployment rate is advantageous for a twofold reason.…”

“…1 Along the same line, Antonakakis et al (2015) uncovered the existence of remarkable spillover effects between credit growth and output growth in the G7 economies. Miescu (2019), instead, proposed a nonlinear VAR approach to estimate the DY indices for industrial production, inflation, and stock price growth rates. The author confirmed and extended DY's (2015) results, and showed that European countries appear to be highly sensitive to fundamental shocks from the US and Japan.…”

Cross-country connectedness in inflation and unemployment: measurement and macroeconomic consequences

“…2 Another novelty is the use of monthly data that, in terms of the standards of macroeconomic analysis, can be considered as high-frequency data. Although the use of such data is uncommon in the related literature, Miescu (2019) is an exception to which this paper adds. The use of monthly data on CPI inflation and the unemployment rate is advantageous for a twofold reason.…”

“…1 Along the same line, Antonakakis et al (2015) uncovered the existence of remarkable spillover effects between credit growth and output growth in the G7 economies. Miescu (2019), instead, proposed a nonlinear VAR approach to estimate the DY indices for industrial production, inflation, and stock price growth rates. The author confirmed and extended DY's (2015) results, and showed that European countries appear to be highly sensitive to fundamental shocks from the USA and Japan.…”