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

68 Pages Posted: 19 Jan 2005

See all articles by Stephane Dees

Stephane Dees

European Central Bank (ECB)

Filippo di Mauro

European Central Bank (ECB)

M. Hashem Pesaran

University of Southern California - Department of Economics; University of Cambridge - Trinity College (Cambridge)

L. Vanessa Smith

University of York

Date Written: 2006

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

JEL Classification: C32, E17, E47

Suggested Citation

Dees, Stephane and di Mauro, Filippo and Pesaran, M. Hashem and Smith, L. Vanessa, Exploring the International Linkages of the Euro Area: A Global VAR Analysis (2006). CESifo Working Paper Series No. 1425; ECB Working Paper No. 568; IEPR Working Paper No. 04.6. Available at SSRN: https://ssrn.com/abstract=646983

Stephane Dees

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Filippo Di Mauro

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

M. Hashem Pesaran (Contact Author)

University of Southern California - Department of Economics

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

University of Cambridge - Trinity College (Cambridge) ( email )

United Kingdom

L. Vanessa Smith

University of York ( email )

Heslington
University of York
York, YO10 5DD
United Kingdom

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