International Transmissions of Aggregate Macroeconomic Uncertainty in Small Open Economies: An Empirical Approach

33 Pages Posted: 18 Apr 2018

See all articles by Jamie Cross

Jamie Cross

The Australian National University

Chenghan Hou

Hunan University - Center for Economics, Finance and Management Studies

Aubrey Poon

University of Strathclyde - Centre for Applied Macroeconomic Analysis

Date Written: April 10, 2018

Abstract

We estimate the effects of domestic and international sources of macroeconomic uncertainty in three commonly studied small open economies (SOEs): Australia, Canada and New Zealand. To this end, we propose a common stochastic volatility in mean panel VAR (CSVM-PVAR), and develop an efficient Markov chain Monte Carlo algorithm to estimate the model. Using a formal Bayesian model comparison exercise, our in-sample results suggest that foreign uncertainty spillovers shape the macroeconomic conditions in all SOEs, however domestic uncertainty shocks are important for Australia and Canada, but not New Zealand. The general mechanism is that foreign uncertainty shocks reduce real GDP and raise inflation in all SOEs, however the interest rate responses are idiosyncratic; being positive in Australia and New Zealand, and negative in Canada. Conversely, domestic uncertainty shocks tend to raise all three macroeconomic variables. Finally, in a pseudo out-of-sample forecasting exercise, the proposed model also forecasts better than traditional PVAR and CSV-PVAR benchmarks.

Keywords: Bayesian VARs, International Spillovers, State-Space Models, Stochastic Volatility in Mean, Uncertainty

JEL Classification: C11, C32, C53, E37, F69

Suggested Citation

Cross, Jamie and Hou, Chenghan and Poon, Aubrey, International Transmissions of Aggregate Macroeconomic Uncertainty in Small Open Economies: An Empirical Approach (April 10, 2018). CAMA Working Paper No. 16/2018. Available at SSRN: https://ssrn.com/abstract=3160394 or http://dx.doi.org/10.2139/ssrn.3160394

Jamie Cross

The Australian National University ( email )

Chenghan Hou

Hunan University - Center for Economics, Finance and Management Studies ( email )

2 Lushan South Rd
Changsha, Hunan 410082
China

Aubrey Poon (Contact Author)

University of Strathclyde - Centre for Applied Macroeconomic Analysis ( email )

16 Richmond Street
Glasgow 1XQ, Scotland
United Kingdom

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