Abstract
This paper examines the interrelationships among 9 advanced economies using a novel multichannel approach to investigate, beyond the usual causal relationships, the time-varying dimension of the channels conveying causal relationships. The model is derived from the well-known Markov Switching setting and account for systems described by multiple variables. A Markov switching causality measure is adapted to account for information transmissions between distinct multivariate systems. Each country is described by 5 different fundamental variables reflecting its state. Our multichannel causality measure is then applied on these sets of time series to determine, over time, the main channels through which the information is transmitted between the different countries. In a second step, we investigate the relationships existing between these countries and the commodity markets and look at the possible use of the commodity markets as an indirect channel of information transmission between countries.
Highlights
Throughout the last decade, new methodologies and approaches have been developed to better understand the interconnections existing between parts of the global economic system, especially after the last financial crisis
The greater interdependence of markets across the globe explained by the financial globalization, and the financial crisis of 2008 highlighted the necessity for a rethinking of economic and financial policies which requires a better understanding of the mechanisms governing information transmission inside the economy
With regards the exchange rate, we included it in the set of parameters for its close link with the commodity markets and it will prove to be an important driver of the interdependencies between countries and commodity markets
Summary
Throughout the last decade, new methodologies and approaches have been developed to better understand the interconnections existing between parts of the global economic system, especially after the last financial crisis. The greater interdependence of markets across the globe explained by the financial globalization, and the financial crisis of 2008 highlighted the necessity for a rethinking of economic and financial policies which requires a better understanding of the mechanisms governing information transmission inside the economy. This transmission mechanism was investigated from a number of perspectives, relying mainly on causality analysis, for different markets and asset classes such as the equity market [1,2,3,4], the financial market [5, 6], the sovereign bond market [7,8,9] or the commodities [10,11,12,13].
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