International Transmission and Forecasting of Macroeconomic Uncertainty in Small Open Economies: Empirical Results from Large Panel of flexible Bayesian VARs

Abstract

Increasing interconnectedness of global economies has consistently generated a lot of interests among empirical macro-economists in their quest to properly understand the channels of international spillover and macroeconomic shocks and how such crises when they arise, are managed by Small Open Economies. Macroeconomic dynamics of Small Open Economies are largely dictated, shaped and influenced by international shocks and uncertainty in the global economy. To this end, we construct and estimate Bayesian Structural Vector Auto-regression with Common Stochastic Volatility in Mean (B-SVAR-CSV-M) and extract important policy inputs from the model. Comprehensive evaluation of the response of real GDP, inflation and interest rates are analyzed following one standard deviation shock from uncertainty impact matrix is simulated. Empirical exercise from Small Open Economy of Nigeria, South Africa and Ghana are used. Forecasting results using B-SVAR-CSV-M deliver superior forecast when compared to other benchmark models. The results support the findings established in the literature that US economy is the key driver of macroeconomic fluctuations in most of the emerging economies.