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Exploring the International Linkages of the Euro Area: A Global VAR Analysis

Stephane Dees (), Filippo di Mauro (), M Pesaran () and L. Vanessa Smith ()

No 04.6, IEPR Working Papers from Institute of Economic Policy Research (IEPR)

Abstract: This paper presents a global model linking individual country vector error-correcting models in which the domestic variables are related to the country-specific variables as an approximate solution to a global common factor model. This global VAR is estimated for 26 countries, the euro area being treated as a single economy. This paper proposes two important extensions of previous research (see Pesaran, Schuermann and Weiner, 2004). First, it provides a theoretical framework where the GVAR is derived as an approximation to a global unobserved common factor model. Also using average pair-wise cross-section error correlations, the GVAR approach is shown to be quite effective in dealing with the common factor interdependencies and international comovements of business cycles. Second, in addition to generalised impulse response functions, we propose an identification scheme to derive structural impulse responses. We focus on identification of shocks to the US economy, particularly the monetary policy shocks, and consider the time profiles of their effects on the euro area. To this end we include the US model as the first country model and consider alternative orderings of the US variables. Further to the US monetary policy shock, we also consider oil price, US equity and US real output shocks.

Keywords: Global VAR (GVAR); Global interdependencies; global macroeconomic modeling; impulse responses (search for similar items in EconPapers)
JEL-codes: C32 E17 F47 (search for similar items in EconPapers)
Pages: 77 pages
Date: 2004-12
New Economics Papers: this item is included in nep-eec, nep-fmk and nep-mac
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Related works:
Journal Article: Exploring the international linkages of the euro area: a global VAR analysis (2007) Downloads
Working Paper: Exploring the International Linkages of the Euro Area: a Global VAR Analysis (2006) Downloads
Working Paper: Exploring the International Linkages of the Euro Area: a Global VAR Analysis (2005) Downloads
Working Paper: Exploring the International Linkages of the Euro Area: a Global VAR Analysis (2005) Downloads
Working Paper: Exploring the international linkages of the euro area: a global VAR analysis (2005) Downloads
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