Bayesian VAR Model Research Articles

Benchmark effects from the inclusion of Chinese A-shares in the MSCI EM index

We study the implications of benchmark indexing for emerging economies by focusing on the inclusion of Chinese A-shares in the MSCI EM index. Making use of a rich dataset on fund allocations and flows between 2015 and 2020, we document an escalating weight of Chinese exposure in mutual funds and an increasing concentration of fund portfolios. We rely on a Bayesian VAR model to show that the inclusion of A-shares in the MSCI EM index has fostered capital flows into China and has, at the same time, reduced the flows to the other emerging economies listed in the same index.

China’s government spending and global inflation dynamics: The role of the oil price channel

This paper explores the international spillover effects of China’s government spending onto global inflation dynamics and the role of the oil price channel in the transmission process based on a monthly dataset covering 20 OECD economies spanning from January 2000 to September 2021. Based on the estimation results of Large Bayesian VAR models this paper provides three novel findings to the literature. Firstly, China’s government spending expansion significantly raises the CPI of most OECD economies. Secondly, the oil price rises significantly in response to China’s government spending expansion and magnifies its spillover effect on global CPI inflation. Thirdly, the effect of the oil price channel on the international transmission of China’s government spending to the global inflation dynamics crucially depends on the oil import dependence rate and the energy subsidies of the shock recipient countries.

Can monetary policy lean against housing bubbles?

Gali and Gambetti (2015) found protracted episodes in which stock prices rise in response to monetary policy tightening. This counter-intuitive result suggests that raising the policy rate in response to a perceived asset price deviation from fundamentals may fail to contain an emerging bubble. Since housing is often at the epicenter of deep and protracted recessions, it is essential (from a monetary policy perspective) to assess whether the result from Gali and Gambetti (2015) also holds when one considers housing instead of stock prices. Thus, we estimated a Bayesian VAR model based on an asset-pricing framework allowing for rational bubbles in the United States, the United Kingdom, and Canada. In addition, this estimation framework separates the fundamental component of housing prices from its bubble component, derived as the deviation of observed prices from the fundamental values. This allowed us to examine the responses of both components to a monetary policy shock and assess how bubbles may affect the responses of housing prices to monetary policy tightening. According to the results, we found that housing prices respond negatively to an interest rate hike, as common intuition would imply. This indicates that monetary policy may play a role in fighting housing price bubbles.

Measuring Demand and Supply Shocks From COVID-19: An Industry-Level Analysis for India

The present article attempts to decompose the COVID-19-induced shock to output and inflation of the Indian economy at the aggregate and disaggregate levels into demand and supply shocks for the period March 2020 to June 2020, using a structural Bayesian VAR model following Baumeister and Hamilton (2015, 2019). The results of the empirical analysis reveal that while the negative supply shocks dominate at the aggregate and disaggregate levels, their magnitude varies across industries. Demand shocks to output were positive in some industries like the manufacture of food products (10), textiles (13), chemicals and chemical products (20), and electrical equipment (27), but were outweighed by the negative supply shocks. In response to the COVID-19 shock the government announced the three pronged Atmanirbhar Bharat Abhiyan (ABA), which is a blend of demand management, supply management and structural policies. It not only promises to address the short-term distress caused to the industries due to the COVID-19 shock but also attempts to make them self-reliant and resilient to such shocks in future. JEL Classification: E10, C32, C40, E30

Bayesian VAR 모형을 이용한 국내 관광 수요의 코로나 영향력 추정

COVID-19, which caused not only the Korean pandemic but also the global pandemic has had a devastating effect on the global economy as well as the tourism industry. Although the tourism industry has shrunk significantly as a result of COVID-19, especially demand for overseas tourism (-85.1%) has not recovered yet, but domestic tourism demand for Koreans is only -34.7%, providing a new opportunity for the tourism industry. As a result, based on data on tourism demand from 2016 to 2020, this study examined the types of tourist attractions by categorizing them as indoor/outdoor, Man-made/natural, large/small, and by region. The following is the result of setting up the Bayesian VAR model and examining the difference between 2020 quarterly forecasts and actual demand via Historical Decomposition. The rate of decrease in tourism demand in entire 1,364 tourist attractions was 26.21%, and the decrease in demand due to COVID-19 was greater in indoor(-71.27%) than outdoor(-20.58%), Man-made(-55.26%) than natural (-16.78%), and large (-32.59%) tourist attractions rather than small (-27.22%). According to regional analysis, Busan suffered the most damage with -52.96%, which is attributed to the characteristics of tourist attractions(such as beaches) with high density. This study is significant because it examined the types of tourists attractions that visitors visiting during COVID-19 era and provided academic and practical implications for developing strategies and policies to revitalize domestic tourism in the future with-COVID-19 and post-COVID-19 eras.

Analysis of the Impact of U.S. Trade Policy Uncertainty on China Based on Bayesian VAR Model

Using a set of Chinese economic data and a Bayesian vector autoregression (BVAR) model, this study empirically analyzes the spillover effects of U.S. trade policy uncertainty on the output, consumption, investment, and net export in China. The results find that U.S. trade policy uncertainty is an important factor influencing China’s real economy. Specifically, an increase in U.S. trade policy uncertainty has a significant negative effect on China’s output, consumption, and net export in the short and long run, but it will have a negative impact on investment in the short run and a positive impact in the medium and long run.

A Suite of Models for CPI Forecasting

This paper reviews the suite of models the National Bank of Ukraine uses for short-term forecasting of CPI components. I examine the forecasting accuracy of the following econometric models: univariate models, VAR, FAVAR, Bayesian VAR models, and Error Correction models. The findings suggest that for almost all components there are models that outperform benchmark AR models. However, the best performing individual model at each horizon for each component differs. Combined forecasts obtained by averaging the models’ forecasts produce acceptable and robust results. Specifically, the combined forecasts are most accurate for core inflation, while they can beat the AR benchmark more frequently than other types of models when it comes to the raw food price index. This study also describes relevant data restrictions in wartime, and highlights avenues for improving the current suite of models for CPI forecasting.

Foreign and Domestic Uncertainty Shocks in Four Open Economies

This paper investigates how the economic performance of four economies with floating exchange rates is affected by shocks in domestic and US economic policy uncertainty. We estimate a Bayesian VAR model describing the dynamics of ten local and US variables for each of the four countries and use it to evaluate the response of the system to structural shocks. The analysis reveals that increased economic uncertainty in the US reduces industrial output in all the countries analysed, while the effect of increased domestic uncertainty varies across the economies. A key finding concerns the role of the exchange rate. Whereas the real effective exchange rate amplifies the effect of uncertainty shocks in the US, it typically helps absorb shocks in the open economies. This asymmetry may reflect the role of the US as a safe haven in times of increased uncertainty.Supplementary InformationThe online version contains supplementary material available at 10.1007/s11079-021-09656-0.

Does pandemic risk affect yield spreads in the EMU?

Since 2020, the world is facing a huge pandemic crisis caused by an acute respiratory coronavirus syndrome. Beyond the impact on the population's health or on normal social interaction, the virus led to a huge economic slowdown, requiring the prompt EMU's authority's reaction. The current paper explores how the sovereign yield spreads of EMU countries with respect to German bonds were affected during the pandemic period. To this end, I employ dynamic panel methods, the Pooled Mean Group estimator of Pesaran et al. (1999) and the Dynamic Common Correlated Effects estimator of Chudik and Pesaran (2015), which accounts for heterogeneous effects across countries and the non-stationarity of spreads and of their determinants. The model uncertainty is studied with a Bayesian VAR (BVAR) approach. The results reveal that, in addition to fundamentals (economic growth, large public debt, inflation, financial instability, country's competitiveness and domestic investment), pandemic risk puts also substantial upward pressure on sovereign bond yields both, in the long-run and short-run on the selected period. Pandemic risk seems to raise yield spreads in the 14 EMU countries in the short-run, while disease mitigation measures reduce them in the long-run. Same negative effect of disease mitigation measures on yield spreads are also found with BVAR model. Results are relatively robust across different empirical methods and considered scenarios.

The Relation between the High-Yield Bond Spread and the Unemployment Rate in the Euro Area

In this paper, we study the relation between the high-yield bond spread and the unemployment rate in the euro area. This is done using Bayesian VAR models with stochastic volatility. The models are estimated assuming both Gaussian and non-Gaussian distributions for the error terms. Analysing data ranging from January 1998 to December 2020, our results show that an increase in the high-yield bond spread increases the unemployment rate. In terms of the specification of the models, we find that Gaussian error terms are preferred. Our findings hence lend support for the large body of previous literature relying on a Gaussianity assumption in their modelling frameworks.

Model-based approach for scenario design: stress test severity and banks' resiliency

After the financial crisis, evaluating the financial health of banks under stressed scenarios has become common practice among supervisors. According to supervisory guidelines, the adverse scenarios prepared for stress tests need to be severe but plausible. The first contribution of this paper is to propose a model-based approach to assess the severity of the scenarios. To do so, we use a Large Bayesian VAR model estimated on the Italian economy where potential spillovers between the macroeconomy and the aggregate banking sector are explicitly considered. We show that the 2018 exercise has been the most severe so far, in particular, due to the path of GDP, the stock market index and the 3-month Euribor rate. Our second contribution is an evaluation of whether the resilience of the Italian banking sector to adverse scenarios has increased over time (for example, thanks to improved risk management practices induced by greater awareness of risks that come with performing stress test exercises). To this scope, we construct counterfactual exercises by recalibrating the scenarios of the 2016 and 2018 exercises so that they have the same severity as the 2014 exercise. We find that in 2018, the economy would have experienced a smaller decline in loans compared to the previous exercises. This implies that banks could afford to deleverage less, i.e. maintain a higher exposure to risk in their balance sheets. We interpret this as evidence of increased resilience.

Of Votes and Viruses: The UK Economy and Economic Policy Uncertainty

This paper examines the relation between GDP growth, Divisia money growth, CPI inflation, financial stress, and the United Kingdom's economic policy uncertainty in the context of its departure from the European Union. We employ two Bayesian VAR models which account for the extreme observations in macroeconomic and financial time series resulting from the COVID-19 pandemic outbreak. We document a contractionary effect of an economic policy uncertainty shock on GDP growth, which is not present in a model which does not account for the COVID-19-related outliers. Additionally, we find that GDP growth is enhanced by Divisia monetary stimulus but hampered by increases in financial stress. The results from a stochastic volatility in mean threshold model also uncover different dynamics of transmission of shocks between economic uncertainty and the indicators we study across high and low economic policy uncertainty regimes.

Sorry, You're Blocked.' Economic Effects of Financial Sanctions on the Russian Economy

How large are the macroeconomic effects of financial sanctions and how one can distinguish the sanction shocks from other aggregate shocks affecting the economy at the same time? We employ a Bayesian (S)VAR model to estimate the effects of the Western financial sanctions imposed on the Russian economy in 2014 (first wave) and 2017 (second wave). The sanctions decreased the Russia’s corporate external debt and raised the country spread, but their effects were confounded by falling oil prices in 2014 (negative terms-of-trade, TOT, shock) and rising oil prices in 2017. We begin disentangling the sanction and TOT effects with a conditional forecasting approach, in which we simulate pseudo out-of-sample projections of domestic macroeconomic variables conditioned (i) solely on the oil price changes and then (ii) on both oil prices and external debt deleveraging. For each endogenous variable, we treat the difference between the two projections as the effect of sanctions. We then apply a structural approach to identify sanction shocks. Our results consistently indicate that the sanction effects were negative and non-negligible across the two sanction waves, being sizeable for the financial variables (real interest rate and corporate external debt) and moderate for the real variables (output, consumption, investment, trade balance, and the ruble real exchange rate). We argue that the estimated effects of sanctions are in line with the theoretical predictions from the literature on country spread shocks in open economies.

A Mixed Frequency BVAR for the Euro Area Labour Market

We introduce a Bayesian Mixed-Frequency VAR model for the aggregate euro area labour market that features a structural identification via sign restrictions. The purpose of this paper is twofold: we aim at (i) providing reliable and timely forecasts of key labour market variables and (ii) enhancing the economic interpretation of the main movements in the labour market. We find satisfactory results in terms of forecasting, especially when looking at quarterly variables, such as employment growth and the job finding rate. Furthermore, we look into the shocks that drove the labour market and macroeconomic dynamics from 2002 to early 2020, with a first insight also on the COVID-19 recession. While domestic and foreign demand shocks were the main drivers during the Global Financial Crisis, aggregate supply conditions and labour supply factors reflecting the degree of lockdown-related restrictions have been important drivers of key labour market variables during the pandemic.

Monetary policy, financial shocks and economic activity

This paper contributes to a deeper understanding of macroeconomic outcomes to financial market disturbances and the central bank’s role in financial stability, by using Bayesian VAR (BVAR) models. We document that a shock that increases credit to non-financial sector leads to a persistent decline in economic activity. In addition, we examine whether the behavior of financial variables is useful in signaling the 2008 recession. The answer is positive as our medium-scale BVAR generates early warning signals pointing to a sustained slowdown in growth. Finally, we suggest that the expansion phase of the business cycle can be subdivided into an early and a late expansion. Based on this distinction, we show that if the Fed had raised the policy rate when the economy moved from the early to late expansion, it could have mitigated the severity of the last recession.

Real interest rate convergence and monetary policy independence in CEE countries

In this paper we provide new empirical evidence relevant for discussions on monetary policy independence in the context of euro adoption in three Central and Eastern European (CEE) countries: Czechia, Hungary and Poland. Unlike many other authors, in this paper we focus on real and not nominal interest rates as real interest rates are at the hearth of modern macroeconomic and monetary policy theory. In the paper we employ several methodologies to test the convergence of real interest rates between these countries and the euro area and to determine the main drivers of real interest rates. Based on the unit root analysis we find evidence of convergence of real interest rates in these countries, thus confirming the real interest rate parity (RIRP) hypothesis. Next, using principle component analysis (PCA) we show that common factor extracted from the sample of CEE countries and individual euro area countries can explain high proportion of real interest rate developments in these countries. Finally, results of our newly proposed analytical framework for the analysis of determinants of real interest rates in small open economies, based on a Bayesian VAR model with block exogeneity, show that external shocks have non-negligible effect on real interest rate developments in selected CEE countries. Thus, our results indicate that real interest rates in CEE depend on factors that are beyond the scope of domestic monetary policy makers. In this sense we can conclude that (conventional) monetary policy independence in these countries is limited. Thus, we see the loss of monetary policy independence as overly emphasized argument in discussions on the euro adoption in these countries. However, we are aware that national central banks in CEE started to rely more on non-conventional measures recently, which gives them a higher degree of flexibility (and autonomy).

수도권 지역 주택가격 순환주기 변동의 영향요인 분석

The purpose of this study is to analyze the cycle variation of housing sales price in Seoul, Gyeonggi, and Incheon and the factors that influence them. For the purpose, the apartment sales price index, rent price index, 3-year corporate bond interest rate, currency volume, and consumer price index data from November 2003 to July 2020 were used to analyze HP filter and Bayesian VAR model. As a result of the analysis, the housing sales price were 4 cycle variations in Seoul and Gyeonggi and 3 cycle variations in Incheon. In Seoul, the expansion period lasted longer than the contraction period, but the contraction period was longer in Gyeonggi and Incheon. In addition, it was found that the rent price index, corporate bond yield, and currency volume had a significant influence on the cycle variation of housing sales price, and there were differences in influence factors by region. This suggests that the government's real estate policy needs to be subdivided and established by region rather than a consistent regulatory-oriented policy.

The effects of geopolitical risk and economic policy uncertainty on dry bulk shipping freight rates

ABSTRACT We examine the effects of geopolitical risk (GPR) and economic policy uncertainty (EPU) on shipping freight rates using a Bayesian VAR model. A positive shock to global GPR has an immediate positive, but gradually diminishing, effect on dry bulk shipping freight rates. This effect is driven by global rather than country-specific GPR shocks. Positive shocks to EPU indices for the U.S., Brazil, and China trigger a negative response of dry bulk shipping freight rates that builds gradually over several months. Historical cumulative effects of both GPR and EPU shocks on freight rates can be large and of different signs during different subperiods. Our results are important for both shipowners and charterers when fixing chartering strategies and prioritizing investments in newbuilding or second-hand vessels.

Digitalization, retail trade and monetary policy

We study the role of digital transformation in the retail trade sector for the effectiveness of monetary policy. With the emergence of online retail trade, dynamic pricing concepts were introduced which reduced menu costs and rendered price changes more frequent. Our two-sector New Keynesian model implies that the real effects of monetary policy abate as the share of online retail trade rises. These theoretical results are empirically confirmed by means of an interactive Bayesian VAR model using data for the Euro area. Our findings identify a structural rather than a cyclical phenomenon for diminished monetary policy effectiveness.

Assessing the effectiveness of the emergency liquidity assistance tool in the euro area

AbstractWe examine the role and the efficiency of the emergency liquidity assistance (ELA) tool in the Euro area which has been used to confront the contagion in the banking sector and the illiquid financial market conditions. We study four European countries (Belgium, Cyprus, Greece, and Ireland), which have received substantial ELA since the 2008 financial crisis. Through Bayesian VAR models, we seek to determine the effectiveness of national central bank lending, which includes the amount of ELA received by the domestic banking sector, an assessment of the direct effect of ELA on banks' liquidity and lending through deposits thus allowing banks to supply loans. In general, we find that the ELA tool was very effective in alleviating financial strains in these countries' central banks. For the Greek case, in particular, our findings indicate that the ELA was influenced not only from any changes in bank deposits but also from changes in the spread between the 10–year Greek and German government bond yields. Finally, the volume of non‐performing loans in Greek banks was declining to capital injections to banks as their capital base was continually being restored through the ELA mechanism.