How External Factors Affect Domestic Economy: Nowcasting an Emerging Market

Serhat Solmaz and Marzie Taheri Sanjani

No 2015/269, IMF Working Papers from International Monetary Fund

Abstract: External headwinds, together with domestic vulnerabilities, have loomed over the prospects of emerging markets in recent years. We propose an empirical toolbox to quantify the impact of external macro-financial shocks on domestic economies in parsimonious way. Our model is a Bayesian VAR consisting of two blocks representing home and foreign factors, which is particularly useful for small open economies. By exploiting the mixed-frequency nature of the model, we show how the toolbox can be used for “nowcasting” the output growth. The conditional forecast results illustrate that regular updates of external information, as well as domestic leading indicators, would significantly enhance the accuracy of forecasts. Moreover, the analysis of variance decompositions shows that external shocks are important drivers of the domestic business cycle.

Keywords: WP; open economy; Nowcasting; Bayesian estimation; VAR; Emerging Market; home economy; economy interest rates; aggregated external shocks; counterfactual economy; GDP dynamic; economy block; simulated economy; Cyclical indicators; Production growth; Industrial production; Business cycles; Global (search for similar items in EconPapers)
Pages: 23
Date: 2015-12-23
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Citations: View citations in EconPapers (3)

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