Identifying Global and National Output and Fiscal Policy Shocks Using a GVAR

Alexander Chudik, M Pesaran () and Kamiar Mohaddes ()

A chapter in Essays in Honor of Cheng Hsiao, 2020, vol. 41, pp 143-189 from Emerald Publishing Ltd

Abstract: Abstract This chapter contributes to the growing global VAR (GVAR) literature by showing how global and national shocks can be identified within a GVAR framework. The usefulness of the proposed approach is illustrated in an application to the analysis of the interactions between public debt and real output growth in a multicountry setting, and the results are compared to those obtained from standard single country VAR analysis. We find that on average (across countries) global shocks explain about one-third of the long-horizon forecast error variance of output growth, and about one-fifth of the long-run variance of the rate of change of debt-to-GDP. Evidence on the degree of cross-sectional dependence in these variables and their innovations are exploited to identify the global shocks, and priors are used to identify the national shocks within a Bayesian framework. It is found that posterior median debt elasticity with respect to output is much larger when the rise in output is due to a fiscal policy shock, as compared to when the rise in output is due to a positive technology shock. The cross-country average of the median debt elasticity is 1.45 when the rise in output is due to a fiscal expansion as compared to 0.76 when the rise in output follows from a favorable output shock.

Keywords: Factor-augmented VARs; global VARs; identification of Global and country-specific shocks; Bayesian analysis; public debt and output growth; debt elasticity; C30; E62; H6 (search for similar items in EconPapers)
Date: 2020
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Related works:
Working Paper: Identifying Global and National Output and Fiscal Policy Shocks Using a GVAR (2019)
Working Paper: Identifying global and national output and fiscal policy shocks using a GVAR (2019)
Working Paper: Identifying Global and National Output and Fiscal Policy ShocksUsing a GVAR (2019)
Working Paper: Identifying Global and National Output and Fiscal Policy Shocks Using a GVAR (2018)
Working Paper: Identifying Global and National Output and Fiscal Policy Shocks Using a GVAR (2018)
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