Common factors in small open economies: inference and consequences

Pablo Guerron

No 10-4, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: Inference about common international stochastic trends and interest rates is gained using a small open economy model, data from seven developed countries, and Bayesian methods. Shocks to these common factors explain up to 17 percent of the variability of output in several economies. Country-specific preference and premium disturbances account for the bulk of the volatility observed in the data. There is substantial heterogeneity in the estimated structural parameters as well as stochastic processes for the countries in the sample. This diversity translates into a rich array of impulse responses across countries. According to the model, the recent low international interest rates might have initially deepened the decline of GDP in several developed economies.

Keywords: Econometric models; Recessions; Business cycles; International economic relations (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-cba, nep-mac and nep-opm
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