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

112 Pages Posted: 21 Feb 2019

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: 2019

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 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 1.58 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 and output growth, debt elasticity

JEL Classification: C300, E620, H600

Suggested Citation

Chudik, Alexander and Pesaran, M. Hashem and Mohaddes, Kamiar, Identifying Global and National Output and Fiscal Policy Shocks Using a Gvar (2019). CESifo Working Paper No. 7454, Available at SSRN: https://ssrn.com/abstract=3338808

Alexander Chudik (Contact Author)

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

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

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 )

Trumpington Street
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/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
35
Abstract Views
267
PlumX Metrics