International macroeconomic vulnerability

Márcio Garcia, Diogo Guillen, Bernardo Ribeiro and João Velloso

Journal of International Money and Finance, 2024, vol. 146, issue C

Abstract: Small open economies are known to be impacted by shocks to larger economies. This phenomenon is known as macroeconomic vulnerability. We propose and implement a novel index of macroeconomic vulnerability to foreign shocks for a given pair of a large economy and a small open economy. It uses a structural time-varying Bayesian VAR with a block-exogeneity hypothesis. The index is based on the sum of the responses of the small open economy to shocks in the large economy over time, thus allowing us to disentangle and measure the source of the shock, the impact variables, and the duration of impact. We highlight two results out of the many that our index unveils. First, we do not find a difference between the international impact of U.S. shocks during periods of crises versus stability. Second, we find that there is a growing decouple between emerging markets (EM) and developed markets (DM) on how their domestic inflation is affected by U.S. output shocks. Our approach can also be used to elucidate previously unknown transmission channels or unmeasured theoretical mechanisms. Finally, using a sample of developed and developing countries, we find that global banks do not increase the macroeconomic vulnerability of a country.

Keywords: Index of business cycle co-movement; Synchronization; Time-varying structural vector auto regression; Impulse response functions; Decoupling; Global banks (search for similar items in EconPapers)
JEL-codes: C11 C32 F36 F41 G15 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:146:y:2024:i:c:s0261560624000925

DOI: 10.1016/j.jimonfin.2024.103105

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