International transmissions of aggregate macroeconomic uncertainty in small open economies: An empirical approach

Jamie Cross, Chenghan Hou and Aubrey Poon

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: We estimate the effects of domestic and international sources of macroeconomic uncertainty in three commonly studied small open economies (SOEs): Australia, Canada and New Zealand. To this end, we propose a common stochastic volatility in mean panel VAR (CSVM-PVAR), and develop an efficient Markov chain Monte Carlo algorithm to estimate the model. Using a formal Bayesian model comparison exercise, our in-sample results suggest that foreign uncertainty spillovers shape the macroeconomic conditions in all SOEs, however domestic uncertainty shocks are important for Australia and Canada, but not New Zealand. The general mechanism is that foreign uncertainty shocks reduce real GDP and raise inflation in all SOEs, however the interest rate responses are idiosyncratic; being positive in Australia and New Zealand, and negative in Canada. Conversely, domestic uncertainty shocks tend to raise all three macroeconomic variables. Finally, in a pseudo out-of-sample forecasting exercise, the proposed model also forecasts better than traditional PVAR and CSV-PVAR benchmarks.

Keywords: Bayesian VARs; International Spillovers; State-Space Models; Stochastic Volatility in Mean; Uncertainty (search for similar items in EconPapers)
JEL-codes: C11 C32 C53 E37 F69 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2018-04
New Economics Papers: this item is included in nep-for and nep-mac
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2018-16

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