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

51 Pages Posted: 24 Jan 2019 Last revised: 29 Apr 2020

See all articles by Alexander Chudik

Alexander Chudik

Federal Reserve Banks - Federal Reserve Bank of Dallas

M. Hashem Pesaran

University of Southern California - Department of Economics

Kamiar Mohaddes

University of Cambridge - Judge Business School; University of Cambridge - King's College, Cambridge

Multiple version iconThere are 3 versions of this paper

Date Written: 2018-12-26

Abstract

The paper 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 multi-country 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 is 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 1.58 when the rise in output is due to a fiscal expansion as compared to 0.75 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, output growth, debt elasticity

JEL Classification: C30, E62, H6

Suggested Citation

Chudik, Alexander and Pesaran, M. Hashem and Mohaddes, Kamiar, Identifying Global and National Output and Fiscal Policy Shocks Using a GVAR (2018-12-26). Globalization and Monetary Policy Institute Working Paper No. 351, Available at SSRN: https://ssrn.com/abstract=3321607 or http://dx.doi.org/10.24149/gwp351

Alexander Chudik (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

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M. Hashem Pesaran

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

Kamiar Mohaddes

University of Cambridge - Judge Business School ( email )

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Cambridge, CB2 1AG
United Kingdom
+44 (0)1223 766933 (Phone)

HOME PAGE: http://https://www.mohaddes.org/

University of Cambridge - King's College, Cambridge ( email )

King's Parade
Cambridge, CB2 1ST
United Kingdom
+44 (0)1223 766933 (Phone)

HOME PAGE: http://https://www.mohaddes.org/

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