Global Vector Autoregressive Research Articles

Geopolitical Risk and Food Price Inflation: A GVAR Analysis of BRICS and the G7

ABSTRACT We investigate the influence of geopolitical risk on domestic food prices in 12 economies (BRICS and the G7) using a global vector autoregressive (GVAR) approach from 2003M1 to 2022M9. The results show that geopolitical risk shocks cause increases in international prices (oil, agricultural, and general commodity prices). We found that these shocks also provoke fluctuations in domestic food prices. The variance decomposition indicated that international prices and geopolitical risk contribute to the formation of domestic food prices. Finally, the estimates suggest relevant differences between the formation of domestic food prices in BRICS and G7 countries.

Spillovers between cryptocurrencies and financial markets in a global framework

We employ the Bayesian Global Vector Autoregression (BGVAR) model to examine the transmission of adverse shocks originating in the cryptocurrency market to global financial markets. The analysis shows that these spillover effects are not limited to a specific group of countries but are instead global in nature. The results indicate that shocks originating in the cryptocurrency market adversely affect stock markets, bond indices, exchange rates, and volatility indices. These shocks, while typically moderate in magnitude and short in duration, suggest that cryptocurrencies act as mediators of short-term negative shocks. The study also underscores the heterogeneous nature of these impacts across different financial markets and countries, highlighting the varying sensitivities and responses to cryptocurrency market fluctuations. Importantly, this research represents the first application of the GVAR model in the context of the cryptocurrency market, to the best of our knowledge.

Climate pattern effects on global economic conditions

This study investigates how El Niño–Southern Oscillation (ENSO) climate patterns affect global economic conditions. Prior research suggests that ENSO phases, particularly El Niño, influence economic outcomes, but with limited consensus on their broader macroeconomic impacts. Using a novel monthly dataset from 20 economies, covering 80% of global output from 1999 to 2022, we employ a global augmented vector autoregression with local projections (GAVARLP) model. The empirical findings suggest that El Niño boosts output with minimal inflationary effects, reducing global economic policy uncertainty, while La Niña raises food inflation, which can amplify aggregate inflation as a “second-round” effect, amplifying uncertainty. These findings shed light on the transmission channels of climate shocks and highlight the significant role of ENSO in shaping global economic conditions, emphasizing why climate shocks should be a concern for policy markers.

Global uncertainty and exchange rate conditions: Assessing the impact of uncertainty shocks in emerging markets and advanced economies

Economic and financial conditions respond significantly to increased measures of uncertainty, particularly in economic policy, monetary policy, and financial markets. This research employs the global vector autoregression (global VAR) model to assess the response of bilateral exchange rates, exchange rate volatility, exchange market pressure, and nominal and real effective exchange rates to shocks in global economic and financial uncertainty, along with U.S. monetary policy uncertainty, U.S. equity market volatility, and U.S. financial stress indicators. Spikes in uncertainty correspond to immediate increases in exchange rate volatility, buildup of exchange market pressure, and depreciation for emerging markets. The results are compared to advanced economies, China, and Russia separately, identifying key differences across markets.

Assessing the sovereign-bank interdependence in Eurozone core countries

PurposeThe aim of this study is to determine whether financial contagion is transmitted through macroeconomic fundamentals, not only in weaker countries but also in strong European Monetary Union (EMU) economies.Design/methodology/approachThis study conducts, for the first time, an analysis of the spillover effects resulting from a shock to Italian sovereign risk on the banking systems and credit default swaps (CDS) of five EMU core countries during the period 2012–2018, employing a global vector autoregressive (GVAR) approach. Spatial interdependence is quantified through the cross-country distance in the deficit-to-gross domestic product (GDP) ratio.FindingsThe findings reveal the existence of both a “doom-loop” between banks and sovereign bonds and a “bad neighbours” effect. The susceptibility to spillovers is notably higher in economies displaying a larger deficit-to-GDP ratio. These results suggest that differences in fiscal fundamentals could drive financial contagion even within core countries, indicating a need for evaluating the stability of the entire EMU system.Originality/valueUnlike previous studies, we utilize the cross-country distance in the deficit-to-GDP ratio as a measure of fiscal fundamentals distance for the countries under investigation. To the best of our knowledge, our study is the first to analyse this matter in EMU core countries using a GVAR methodology.

Does fintech matter for financial inclusion and financial stability in BRICS markets?

We investigate whether fintech development expedites financial inclusion and affects the stability of the financial sector in BRICS economies. We first seek to identify the linkage between Fintech development and financial inclusion in the BRICS economies. We then explore if Fintech poses any threat to financial stability by studying the impact of Fintech on three main factors of financial stability; Country risk, Liquidity, and Price volatility to see any possible threat to financial stability. We apply the robust Global Vector Autoregressive (GVAR) model with Bayesian framework to analyze a monthly dataset ranging from 2015 to 2022. By applying a positive shock to Fintech over financial inclusion and financial stability, we reveal a positive dynamic relationship between fintech development and financial inclusion, with fintech exhibiting a long-term influence on financial inclusion in some BRICS countries than others. However, we found no significant evidence that fintech presents any threat to financial stability; at least not in the short term. We offer several policy implications and future research directions.

Assessing the baseline model of WTI oil and stock returns under financial volatility and spillover effects

Do financial volatility shocks matter for WTI oil and stock markets? They should since world economic activity responds to volatility. To investigate this question, we revisit two empirical frameworks widely used in the literature. Our baseline involves the standard identification of oil shocks in structural vector autoregressions (SVAR) with (world) oil supply, demand, and real oil prices. We then propose a global vector autoregressive (GVAR) model integrating 14 major world economies. We introduce the volatility measure (VIX), various stock markets, and compare two oil demand proxies: real economic activity (REA) based on commodity prices and world industrial production (WIP). The results of the impulse response analysis do not indicate major differences across models. However, when measuring the share of oil price variance explained by shocks to VIX (or to U.S. high-bond corporate yield) SVAR overestimates the influence of VIX. We find (world) demand shocks explain a larger part of the variance of oil and stock markets compared to supply shocks. In SVAR, new information coming from a one standard deviation shock to VIX is incorporated negatively and instantaneously on real oil prices: −1.6 for REA and −1.4 for WIP. In GVAR these are reduced slightly to −1.2 from VIX and to −0.6 if coming from corporate bond yield shocks. Our study highlights the sensitivity of econometric results to distinct approaches: one that identifies shocks and another that captures spillover effects.

A Multicountry Model of the Term Structures of Interest Rates with a GVAR

Abstract Extant multicountry affine term structure models (ATSMs) handle global financial interdependence at the cost of increasing model dimensionality. To address this challenge, we propose a novel no-arbitrage ATSM with risk factor dynamics following a global vector-autoregressive (GVAR). Compared to referenced benchmarks, the GVAR − ATSM offers a more parsimonious representation, enables a faster estimation process, produces more precise model estimates, yields more plausible term premia dynamics, and improves bond yield out-of-sample forecasting. Furthermore, our empirical findings reveal the significant impact of China’s economic stances on Latin American yield curve dynamics, underscoring its importance as a global economic player.

Spatial and temporal diffusion of property prices and sales across British regions

Purpose The purpose of this study is to reveal the dynamics of house prices and sales in spatial and temporal dimensions across British regions. Design/methodology/approach This paper incorporates two empirical approaches to describe the behaviour of property prices across British regions. The models are applied to two different data sets. The first empirical approach is to apply the price diffusion model proposed by Holly et al. (2011) to the UK house price index data set. The second empirical approach is to apply a bivariate global vector autoregression model without a time trend to house prices and transaction volumes retrieved from the nationwide building society. Findings Identifying shocks to London house prices in the GVAR model, based on the generalized impulse response functions framework, I find some heterogeneity in responses to house price changes; for example, South East England responds stronger than the remaining provincial regions. The main pattern detected in responses and characteristic for each region is the fairly rapid fading of the shock. The spatial-temporal diffusion model demonstrates the presence of a ripple effect: a shock emanating from London is dispersed contemporaneously and spatially to other regions, affecting prices in nondominant regions with a delay. Originality/value The main contribution of this work is the betterment in understanding how house price changes move across regions and time within a UK context.

A New Look at Cross-Country Aggregation in the Global VAR Approach: Theory and Monte Carlo Simulation

AbstractRequirements to understand and forecast the behavior of complex macroeconomic interactions mandate the use of high-dimensional macroeconometric models. The Global Vector Autoregressive (GVAR) modeling technique is very popular among them and it allows researchers and policymakers to take into account both the complex interdependencies that exist between various economic entities and the global economy through the world’s trade and financial channels. However, determining the cross-section unit size while using this approach is not a trivial task. In order to address this issue, we suggest an objective procedure for the detection of the size of the cross-country aggregation in GVAR models. While doing so, we depart from the Akaike Information Criterion (AIC) and propose an analytical modification to it, mainly employing an ad hoc approach without violating Akaike’s main principles. To supplement the theoretical results, small sample performances of those procedures are studied in Monte Carlo experiments as well as implementing our approach on real data. The numerical results suggest that our ad hoc modification of AIC can be used to determine the structure of the cross-section unit dimension in GVAR models, allowing the researchers and policymakers to build parsimonious models.

The impact of the US stock market on the BRICS and G7: a GVAR approach

PurposeThe authors investigate the impact of the US stock market on the economies of the BRICS and major industrialized economies (G7).Design/methodology/approachThe authors construct the world economy and the vulnerability between economies using three economic integration variables: bilateral trade, bilateral direct investment and bilateral equity positions. Global vector autoregressive (GVAR) empirical studies usually adopt trade integration to estimate models. The authors complement these studies by using bilateral financial flows.FindingsThe authors summarize the results in four points: (1) financial integration variables increase the effect of the US stock market on the BRICS and G7, (2) the US shock produces similar responses in these groups regarding industrial production, stock markets and confidence but different responses regarding domestic currencies: in the BRICS, the authors detect appreciation of the currencies, while in the G7, the authors find depreciation, (3) G7 stock markets and policy rates are more sensitive to the US shock than the BRICS and (4) the estimates point out to heterogeneities such as the importance of industrial production to the transmission shock in Japan and China, the exchange rate to India, Japan and the UK, the interest rates to the Eurozone and the UK and confidence to Brazil, South Africa and Canada.Research limitations/implicationsThe results reinforce the importance of taking into account different levels of economic development.Originality/valueThe authors construct the world economy and the vulnerability between economies using three economic integration variables: bilateral trade, bilateral direct investment and bilateral equity positions. GVAR empirical studies usually adopt trade integration to estimate models. The authors complement these studies by using bilateral financial flows.

China’s macroeconomic performance affects trading partners: How can their policies respond?

Utilizing expanded data analysis, this study aims to determine how China's macroeconomic performance affects the global economy. Employing the Global Vector Auto Regression (GVAR) model, we investigate the impact of China's macroeconomic variables on the economies of its selected trading partners throughout the world. For 2000Q1–2019Q4, developed countries (the US, Hong Kong), developing Europe countries (Russian Federation and Poland), and two developing Asia countries (Vietnam and India) show that Chinese macroeconomic performance has a greater impact than middle east and central Asia, Sub-Saharan Africa, and Western hemisphere. The Chinese GDP shock hits emerging Europe harder because of its extensive Russian production network. Results reveal that Chinese depreciation impacts developing Europe and Asia, while the Chinese stock market shock hits advanced economies more. Advanced and developing Asian economies are greatly affected by TV shock. Chinese FDI affects the Middle East and Central Asia, because of the China-Pakistan Economic Corridor. China trading partners use macroeconomic statistics to assess their economic priorities, industrial strengths, and weaknesses to create national interest plans. Currency adjustment, trade policies, domestic stimulus, and market diversification can minimize negative effects or capitalize on possibilities from China's macroeconomic conditions.

Impact of Chinese financial shocks: A GVAR approach

<abstract> <p>This article analyzes the influence of Chinese financial shocks on emerging and advanced economies using a GVAR (Global Vector Autoregressive) from 1985Q4 to 2016Q4. We summarize our findings in five points: i) adverse shocks in Chinese financial markets can cause a global recession; ii) these shocks trigger the "flight to quality", leading to the depreciation of domestic currencies to the U.S. dollar; iii) stock and exchange markets contribute to transmitting the shock to domestic economies; iv) commodity prices are sensitive to these shocks; v) the impact of the Chinese financial shock increased in the new millennium. Finally, the financial system of China has the potential to provoke worldwide macroeconomic fluctuations.</p> </abstract>

Does monetary policy impact income inequality?

PurposeThis article analyzes the impact of monetary policy on income inequality across 16 advanced economies. The author investigates three key points: (1) the relationship between domestic monetary policy and domestic income inequality, (2) the spillover effect of USA monetary policy (including quantitative easing) on international inequality and (3) the quantitative influence of the monetary policies of both the USA and the Eurozone on the formation of domestic income inequalities.Design/methodology/approachThe author employed the Global Vector Autoregressive (GVAR) model, which uses Vector Autoregressive with Exogenous Variables (VARXs) models of each economy to build an integrated system that enables us to evaluate individual responses to global shocks.FindingsThe author's analysis reveals that (1) contractionary monetary policy exacerbates domestic inequality and (2) USA monetary policy, including quantitative easing, affects international inequality. Furthermore, the author's variance decomposition analysis highlights that USA monetary policy is especially influential on income inequality in Norway and Sweden. Additionally, the cointegrating analysis confirms that monetary policy's impact on inequality persists in the long term.Originality/valueMost of the studies focused on investigating domestic economies as closed economies. However, the author's approach differs in that the author uses the GVAR, which treats all economies as open. This allows us to incorporate the world economy into the domestic dynamics and connect the economies using bilateral trade. Another advantage of the GVAR is that it captures spillover effects by modeling each economy and constructing the international economy.

Spillover effect of China's economic development on countries along “Maritime Silk Road” – Based on vector auto regression

Since the cooperation initiative of Maritime Silk Road was put forward, more and more countries and regions have joined maritime silk road trade. The shift of economic growth rate in China and the decline in import and export trade will inevitably have a certain impact on the economic growth of countries and regions along this route. Based on this, this study first analyzed the transmission channels of economic volatility spillover effects. And a transnational panel model and global vector auto-regression are used to study the spillover effect of China's economic development on economic variables of countries and regions along this line. After the 15th quarter, one standard deviation of China's real GDP has a significant positive impact on the real GDP of East Asian countries by 0.597%, averagely. And the autoregressive coefficient of economic spillover effecting of China's economic growth on these countries along Maritime Silk Road is 0.244, which is significant at 1%, indicating that the spillover effect is significant. The regression coefficient of spillover effect of China's economic development on GDP growth in countries along this route is 0.472, which is significant at 1%. And the regression coefficient of spillover effect of China's economic development on trade balance of countries along this line is 0.967, with a significance level of 1%. Based on these research results, suggestions are proposed in this study, China should first optimize its trade structure with countries and regions along the route, and customize different foreign trade policies based on the specific characteristics of countries along the route. While developing and improving trade relations with countries and regions along the route, we will further achieve outward direct investment in these countries and regions, reducing the negative impact of economic fluctuations on China's economic development. The research aims to promote the quality improvement of China's economic development and growth, and achieve win-win cooperation among countries along the Maritime Silk Road.

The three co’s to jointly model commodity markets: co-production, co-consumption and co-trading

In this study, we develop a framework, based on a global vector autoregression (GVAR) model, to unite two perspectives on commodity markets, the commodity-specific, single-market-centered approach, investigating the micro- and macroeconomic drivers of commodity prices, and the market perspective, which observes joint movements of commodity prices on exchanges. Thereby, the GVAR model disentangles single market from inter-market effects, while simultaneously accounting for the impact of macroeconomic factors. We apply the framework to the six industrial metals markets, reflecting their interdependencies via their co-production, co-consumption, or co-trading relation. In particular, the numerous significant spillover effects in the cross-commodity dimension underline the importance of jointly modeling commodity markets. While the strong co-movement between industrial metal prices is represented exceptionally well by our framework, the microeconomic supply and demand attributes of the commodities have significant impact, within and across markets, even on price variables, highlighting their relevance in modern commodity market models. Moreover, we detect global shocks, e.g., an increase in global demand, affect each commodity market to a similar extent.

The Effect of US Uncertainty Shock on International Equity Markets: The Role of the Global Financial Cycle

We contribute to the literature on the international propagation of uncertainty shocks with a Global Vector Autoregressive (GVAR) model that quantifies the spillover effects of uncertainty shocks in the US on to real equity prices of 32 advanced and emerging countries (besides the US). In this regard, we also account for the role of global financial market conditions in the propagation of these shocks, using high and low values of the Global Financial Cycle (GFCy) index. Using quarterly data over 1980:1 to 2019:2, our findings reveal greater response of advanced markets than emerging counterparts to an US uncertainty shock. Further, we show consistent higher negative responses during weak financial conditions than otherwise, confirming the intervening role of the GFCy index. Our results have important implications for investors and policymakers.

Macro Credit Risk Stress Testing in Tanzanian Banking Sector: A Global Vector Autoregressive (GVAR) Approach

ABSTRACT This study conducted a macro credit risk stress testing framework for assessing the impact of global transmissions on Tanzania’s banking sector from Q12006 to Q42020, using the Global Vector Autoregressive Regression (GVAR) model with seven countries. The adoption of the GVAR model enabled us to take into account non-linear relationships, capture business cycle effects and the global interaction. This study focused on assessing the projected responsiveness of Tanzania’s credit risk to shocks originating from domestic, global and foreign variables in relation to USA, China and South Africa. This study found that the global transmissions have an impact on the Tanzanian banking sector, with a significant exposure witnessed from the increase in the crude oil price index. On a domestic level, the results revealed that projected inflation rate shocks have a more responsive impact on banking sector credit risk compared to real GDP growth. In addition, GDP growth shocks from foreign countries have a slight impact on the banking sector compared to exchange rate risk transmission, given the growing global interconnectedness, thus leading to a spillover effect on the banking sector. Conclusively, Tanzania’s banking sector is not invulnerable to domestic, foreign and global shocks, and therefore warrants monitoring to enhance resilience.

Spillovers effect of gas price on macroeconomic indicators: A GVAR approach

The demand for natural gas as a transitional fuel has been increasing steadily due to global energy transitions. However, the high concentration of natural gas sources among a few producers and the dependence of many consuming economies raises questions about the macroeconomic impact of gas price shocks. Therefore, this study utilizes the global vector autoregressive (GVAR) approach to estimate the spillover effects of natural gas price shocks on key macroeconomic indicators. To enhance the GVAR data vintage, we have incorporated Iran and Russia in 24 countries and updated data till 2020. Our empirical analysis reveals that inflation responds positively to gas price hikes in major gas-consuming countries. Moreover, real GDP responds positively to increased gas prices in resource-rich countries such as Iran and Russia but negatively in other countries. Additionally, an augmentation of resource rents fosters GDP for Iran and Russia. Our findings highlight several policy implications that account for gas price shocks. Therefore, policymakers should consider the spillover effects of gas price shocks and their impact on inflation and real GDP. Moreover, resource-rich countries like Iran and Russia should optimize resource rents to foster economic growth.

New evidence on sources of macroeconomic fluctuations in sub‐Saharan African countries

AbstractFollowing a global vector autoregressive (GVAR) approach, this paper presents new evidence on the validity of international transmission of economic shocks from key trading partners as sources of macroeconomic fluctuations in sub‐Saharan African (SSA) countries. The GVAR model was estimated for 21 SSA countries grouped into three country classes—oil‐rich, other‐resources‐rich and non‐resource‐based economies, to account for output shocks from crucial trading partner countries—United States, United Kingdom, China and Europe. Furthermore, the generalized forecast error variance decompositions results reveal that output shocks from key trading partners constitute significant contributors to changes in key macroeconomic indicators—real gross domestic product, inflation, exchange rate and short‐term interest rate, in the SSA region. The generalized impulse response functions indicate that these economic shocks have more significant impacts on oil‐rich countries than on other country groups. A key recommendation from this study is that SSA countries, especially the resource‐rich economies, need to strengthen and diversify their economic structure, including the trade basket.