Global Vector Autoregressive Model Research Articles

An analysis of the impact of China's macroeconomic performance on its trade partners: Evidence based on the GVAR model.

Economic strategies and planning are critical to a country's growth and development. China, like many other countries, is seeking the most cost-effective trade deals. Using the Global Vector Auto Regression (GVAR) model, this study examined the impact of a shock to China's macroeconomic factors on trading economies. The major findings reveal that there is no co-movement between the shock in Chinese gross domestic product (GDP) and German macroeconomic indicators; however, the shock has a positive and substantial influence on Japan's GDP and Unites States (US)' exchange rate. It is also worth noting that a shock to Chinese trade volume is more susceptible and more disturbing than a shock to US trade volume since it reduces trade volume and causes the Ren Min Bi (RMB) to devalue permanently. Furthermore, the analysis shows that Chinese stock prices have a major influence on German economy since China's GDP, trade volume, and currency appreciate over time when its stock price rises. Finally, the exchange rate shock is beneficial to Germany as it boosts GDP and trade volume but has a negative influence on US stock prices. The current study is, therefore, expected to be a suitable beginning point for the governments and policymakers of trading partners to design an effective trade policy to minimize the impact on major economic variables.

Gold and the global financial cycle

<abstract> <p>We examine the potential of gold and other precious metals as safe havens during negative market shocks caused by the Global Financial Cycle (GFCy). We analyze a vast global vector autoregressive (GVAR) model that includes developing and emerging market countries for a total of 33 countries, from 1979:Q2 to 2019:Q4. This approach allows us to account for individual country peculiarities while also considering the transmission of global shocks. We found that during financial market distress caused by a negative GFCy shock, gold, silver and platinum all serve as hedges. Interestingly, our results suggest that silver and platinum are better hedges than gold, offering greater positive returns in response to negative GFCy shocks, especially in recent years. Overall, our findings support the benefits of investing in precious metals, as they can help investors mitigate losses resulting from global financial shocks. While the metals vary in their hedging ability, platinum and silver offer even greater protection than gold.</p> </abstract>

Построение модели GVAR для российской экономики

The relationship between the economies of various countries and their dependence on the world markets indicate that for econometric analysis of the impact of external shocks on a particular economy, it is necessary to use a model of the global economy. The aim of this paper is to build a global vector autoregression model (GVAR), including Russia as one of the regions, and to obtain the impact of some external economic shocks on Russian macroeconomic indicators. We build a model that includes 41 of the world's major economies, including Russia, and the oil market. The special features of our model are structural shifts in the dynamics of Russian output and the new specification of oil supply and oil demand. Impulse response functions are used to obtain quantitative estimates. In this paper, we analyze the reaction of outputs, oil production volumes and oil prices in response to the output shocks of China and the United States. In response to the negative shock of output in the world's leading economies, outputs in the rest of the world declined for at least the first year after the shock. There was also a significant decline in oil prices and no significant change in oil production volumes in most countries. In addition, as part of the conditional forecast, we estimated the impact of the decline in global demand due to the Covid-19 pandemic on the Russian GDP as 1,3% drop. The rest of the de cline in Russian GDP can be attributed to the internal effects of the pandemic (lockdown). We also obtained a scenario forecast of the dynamics of Russian GDP depending on a decrease in trade and Russian oil price discount, within which the fall in Russian output could reach 3.3% in 2022.

Evaluating forecast performance of global vector autoregressive model

Evaluating forecast performance of global vector autoregressive model

Measuring Global Macroeconomic Uncertainty and Cross-Country Uncertainty Spillovers

We propose an approach for jointly measuring global macroeconomic uncertainty and bilateral spillovers of uncertainty between countries using a global vector autoregressive (GVAR) model. Over the period 2000Q1–2020Q4, our global index is able to summarize a variety of uncertainty measures, such as financial-market volatility, economic-policy uncertainty, survey-forecast-based measures and econometric measures of macroeconomic uncertainty, showing major peaks during both the global financial crisis and the COVID-19 pandemic. Global spillover effects are quantified through a novel GVAR-based decomposition of country-level uncertainty into the contributions from all countries in the global model. We show that this approach produces estimates of uncertainty spillovers which are strongly related to the structure of the global economy.

Cross‐country linkages between ASEAN and non‐ASEAN‐RCEP member states: A global VAR analysis

AbstractThe complex global value chains underlying the Regional Comprehensive Economic Partnership (RCEP) raise an important question on the macroeconomic (output, inflation, exchange rate, and interest rate) exposure of ASEAN to output shocks in the non‐ASEAN‐RCEP members, within the context of expanded regional architecture. This paper uses quarterly data from 1995 to 2018 to estimate a global vector autoregressive (GVAR) model, specially constructed for the RCEP. The GVAR model disentangles the effects and spillovers from output shocks originating in the non‐ASEAN‐RCEP through various trade channels – direct and indirect, and total exports and foreign value‐added (FVA). The model also quantifies the impact of global (the price of oil and materials) shocks on ASEAN through trade linkages. The output shocks in the non‐ASEAN‐RCEP have persistent effects on output growth in ASEAN when transmitted through the intermediary FVA channel than the export channel. The FVA channel is also important for propagating global shocks in the form of oil and material prices. The findings confirm that output in ASEAN is also highly exposed to output shocks originating in the non‐ASEAN‐RCEP economies. The FVA trade channel is vital for explaining the spillovers from the regional output shocks and global price shocks.

Agricultural Grain Markets in the COVID-19 Crisis, Insights from a GVAR Model

The objective of this paper is to combine cross-commodity and spatial price transmission analysis to study the dynamics of the global cereal feed market during the COVID-19 pandemic. After reviewing the nascent literature on the impact of COVID-19 on agricultural markets, we discuss the different impact channels on prices. Then, we provide stylized market reactions of three relevant feed markets, wheat, barley, and maize, to a set of simulated possible future shocks on oil prices, stock-to-use ratios, and export restrictions. These three shocks are useful to assess what could be the consequences of policy responses to COVID-19 (export restrictions) or the disruptions due to the virus (stock-to-use reductions), in a context of lower oil prices. To generate these market reactions, we use a Global Vector Auto Regression (GVAR) model where each market is modelled independently, and connected through trade-based composite variables. We expand the work on the global wheat market by introducing maize and barley. The results of the empirical analysis indicate that the fall in the oil price may have contributed to the stability of the world grain market in early 2020, despite fears of supply chain disruption. We also note that export restrictions could significantly increase global prices, and that such restrictions could affect more than the targeted commodity, through significant cross-commodity price linkages.

Oil Price Uncertainty Shocks and Global Equity Markets: Evidence from a GVAR Model

This paper examines the propagation of oil price uncertainty shocks to real equity prices using a large-scale Global Vector Autoregressive (GVAR) model of 26 advanced and emerging stock markets. The GVAR framework allows us to capture the transmission of local and global shocks, while simultaneously accounting for individual-country peculiarities. Utilising a recently developed model-free, robust estimate of oil price uncertainty, we document a statistically significant and negative effect of uncertainty shocks emanating from oil prices on the large majority of global stock markets, with the adverse effect of oil price uncertainty shocks found to be stronger for emerging economies as well as net oil-exporting nations. Interestingly, however, global stock markets exhibit a great deal of heterogeneity in their recovery following oil uncertainty shocks as some experience rapid corrections in stock valuations while others suffer from extended slumps. While the results are sensitive to the oil uncertainty measure utilised, they suggest that country diversification in the face of rising oil market uncertainty can still be beneficial for global investors as global stock markets exhibit a rather heterogeneous pattern in their recovery rates against oil market shocks.

The (Asymmetric) effect of El Niño and La Niña on gold and silver prices in a GVAR model

Recent studies show that El Niño episodes are generally inflationary because they tend to increase the prices of agricultural commodities and crude oil. Given this, in this paper we examine the inflation-hedging property of gold (along with silver) from a novel perspective by analysing the impact of a negative shock to the negative component of Southern Oscillation Index (SOI) anomalies, i.e., El Niño shock. To this end, we apply a large-scale global vector autoregressive (GVAR) model to 33 countries covering both developed and emerging markets using quarterly data from 1980:Q2 to 2019:Q4. The GVAR methodology provides an appropriate framework to capture the transmission of global climate-related shocks while simultaneously accounting for individual country peculiarities. The results show that both gold and silver serve as good hedges in periods of inflation and rare disaster risks resulting from El Niño negative shocks. Interestingly, silver is a better hedge than gold, as implied by bigger positive real returns in response to El Niño shock. At the same time, La Niña shocks, captured by a positive effect to the positive component of SOI anomalies, fail to have a statistically significant impact on either gold or silver real returns. Overall, our results confirm the inflation-hedging benefits offered by the two precious metals, suggesting that investors can offset losses resulting from inflation-related risks stemming from El Niño events by investing not only in gold, but more so in silver.

Environmental risk of Covid-19 recovery

During Covid-19 pandemic world economy experienced negative growth rate, therefore energy consumption and consequently emission pollution decreased. According to Environmental Kuznets Curve, it is expected that energy consumption and emission pollution increase in response to Covid-19 economic recovery, even higher than its pre-pandemic level. The goal of this paper is to study the environmental risk of Covid-19 economic recovery. We use an Environmentally-Augmented Global Vector Autoregressive Model (E-GVAR) to trace dynamic effects of Covid-19 economic recovery on pollution emission. Using generalized impulse response functions (GIRFs), we investigated the effect of positive economic shocks in real per capita income in China and USA economies on total equivalent emission pollution. The results show that positive economic recovery affects emission pollution significantly. China and emerging economies may experience high risk while Europe region is moderately affected by this positive shock. A positive Economic Shock in China decrease pollution emission in USA over time. It can be attributed to substitution effect of Chinese product in global market. Generally, our results demonstrate spillover effect of transition shocks from large economies to the rest of world and highlights the importance of linkages in the world economy.

Small open economies and external shocks: an application of Bayesian global vector autoregression model.

This study assesses the impact of external shocks on select small open economies (SOEs) using the Bayesian variant of the global vector autoregression model with time varying parameters and stochastic volatility. We account for the curse of dimensionality in the multi-country VAR system by implementing three different priors in the estimation of the parameters of the model: the Minnesota (M-N) prior of Doan–Litterman et al. (1984; Litterman 1986); the Normal-Gamma (N-G) prior of Park and Casella (Bayesian Anal 1:515–533, 2008); and the Stochastic Search Variable Selection (SSVS) prior of George and McCulloch (1995) as extended by Koop and Korobilis (2010, 2013). From our simulation results, we found that global economies of the USA, Western Europe and China are the major drivers of cyclical fluctuation in the SOEs. However, in spite of the perceived superior influence of China on the SOEs GDPs’ response to external shocks, we found no evidence to conclude that the influence is significantly greater than those exerted by the United States or Europe on the bloc’s economies.

The financial US uncertainty spillover multiplier: Evidence from a GVAR model

AbstractThis study examines the role of the global financial cycle (GFCy) in the propagation of uncertainty shocks from the United States to other national economies using a large‐scale global vector autoregressive model of 33 countries. Although the dominant role of US uncertainty over global economic dynamics is established, the findings highlight the moderating role of the GFCy in the spillover effects of uncertainty shocks. The US uncertainty shocks, compared with own‐domestic uncertainty shocks, are found to have a more prominent negative impact on output during stressed market conditions, implied by low values of the GFCy, while the impact turns largely insignificant during high GFCy states. The findings provide evidence in favour of a US uncertainty spillover multiplier, suggesting that the design of monetary policy as a response to US uncertainty needs to be contingent on the state of the integrated global financial markets, captured by the GFCy.

Risky mortgages, credit shocks and cross-border spillovers

This paper describes a novel methodology of measuring risky and conservative mortgage credit using household survey data for 17 European Union countries and the United Kingdom. In addition, we construct time series for both types of credit and embed them into a global vector autoregressive (GVAR) model, so as to study how shocks to both variables affect domestic output and propagate across countries through cross-border banking exposures. The results show that a decrease in risky credit can have long-lasting positive effects on GDP, both in the originating country and its most exposed peers, while a fall in conservative credit is detrimental. In some geographies, negative shocks to both types of credit reduce output, a feature linked to the lower relevance of homeownership which implies that mortgage credit plays a less prominent role in the domestic economy.

Measuring International Uncertainty Using Global Vector Autoregressions with Drifting Parameters

AbstractThis study investigates the time-varying effects of international uncertainty shocks. I use a global vector autoregressive model with drifting coefficients and factor stochastic volatility in the errors to model the G7 economies jointly. The measure of uncertainty is constructed by estimating a time-varying scalar driving the innovation variances of the latent factors, which is also included in the conditional mean of the process. To achieve regularization, I use Bayesian techniques for estimation, and rely on hierarchical global–local priors to shrink the high-dimensional multivariate system towards sparsity. I compare the obtained econometric measure of uncertainty to alternative indices and discuss commonalities and differences. Moreover, I find that international uncertainty may differ substantially compared to identically constructed domestic measures. Structural inference points towards pronounced real and financial effects of uncertainty shocks in all considered economies. These effects are subject to heterogeneities over time and the cross-section, providing empirical evidence in favor of using the flexible econometric framework introduced in this study.

Market Integration and Price Dynamics under Market Shocks in European Union Internal and External Cheese Export Markets.

The dairy sector in the European Union (EU) has experienced policy changes and market shocks recently. Using the global vector autoregressive (GVAR) model, this paper explores regional market integration, the feedback between market shocks and price dynamics, and the link between EU’s cheese export markets and energy market. This paper assesses and compares which influencing factors are typically associated with intra-EU and extra-EU cheese export price movement with regards to shocks to crude oil price, farm-gate raw milk price, and consumer price index (CPI) for food and cheese production of six representative EU member states, respectively. Using generalized impulse response functions, this paper finds that EU’s internal cheese export market is not well integrated, while EU’s external market is well integrated, with France as an exception. It also finds that the external cheese export market is vulnerable to shocks from the energy market compared to the internal market. Raw milk prices from the upstream supply chain have strong spill-over effects on EU’s internal cheese export market, yet their impact on extra-EU cheese export prices is relatively less significant. The movement patterns of extra-EU cheese export prices of Ireland and the UK show similar patterns in the long run. It is concluded that the dynamics of cheese export prices in the internal and external markets of the EU are different under market shocks.

Economic Policy Uncertainty and International Tourism Demand: A Global Vector Autoregressive Approach

In a globalized environment, a major shock or event can reverberate across tourism interdependent countries over time. This paper aims to empirically examine how economic policy uncertainty (EPU) emanating from a large country may influence inbound and outbound tourism in other countries. Using Global Vector Autoregressive (GVAR) model and two alternative measures of EPU, the study finds the modeled effects of EPU are dependent on the source of EPU measures, level of internationalization, and type of trade-weights used. Notably, the results show the “decline-rebound-overshoot” effect of EPU shock on tourism demand, and capture the link between capital flight and outbound travel from China in times of surge in EPU. This research highlights that GVAR is able to capture previously unobserved empirical insights because assessing the international impact of shocks such as economic crises, pandemics, and political instability necessitates accounting for cross-sectional interdependence in tourism flows between many countries.

The ever-evolving trade pattern: a global VAR approach.

This paper focuses on the spillover dynamics of shocks originating in China during the last two decades. More specifically, the paper compares the effects of a shock to China’s GDP and exchange rate using early 2000s trade patterns with those of two decades later. We use a global vector autoregressive (GVAR) model as it allows to consider trade interactions as well as financial linkages through interest rates, stock prices, and exchange rates. Our results indicate that the shock spillovers from China have become more pronounced over the past two decades. While the world has become more exposed to China’s economy, it has become more susceptible to Chinese economic shocks. This paper contributes to the literature by evaluating the dynamics of China’s spillover effects and highlights the structural changes in trade between major global trade players.Supplementary InformationThe online version contains supplementary material available at 10.1007/s00181-021-02182-5.

Does military expenditure impact environmental sustainability in developed Mediterranean countries?

This study aims to examine the relationship between military expenditure and environmental sustainability in developed Mediterranean countries: Greece, France, Italy, and Spain. Sustainable economic growth is strictly related to energy consumption which leads to producing a higher level of carbon emissions. Besides, there may be a nexus between military expenditures and environmental pollution. This study focuses on developed Mediterranean countries since carbon emissions and greenhouse gas emissions are relatively high in these countries. Furthermore, France and Italy are the top countries in terms of total military spending. We investigate the relationship between military expenditure and carbon emissions using the Global Vector Autoregression model proposed by Pesaran et al. (J Bus Econ Stat 22 129:162, Pesaran et al., J Bus Econ Stat 22:129-162, 2004) and Dees et al. (J Appl Econ 22(1):38, Dees et al., J Appl Econ 22:1-38, 2007) between 1965 and 2019. The empirical findings indicated that the relationship between carbon emission and military expenditure should be taken into account from a global perspective for environmental sustainability, and an increase in the global military expenditure seems to be very harmful to the global environment. It can be concluded that country-based prevention cannot provide the desired solution in combating environmental pollution.

Investigation on the Effects of External Shocks on Bangladesh's Economy: An Application of the Gvar Modelling Approach

This paper uses the global vector autoregressive (GVAR) modelling approach to study (1) the effects of negative output shocks on Bangladesh's following trading partners on Bangladesh's economy: the United States, China, Eurozone, India and Saudi Arabia (2) positive global oil price shocks. To represent Bangladesh's macroeconomics, the GVAR model contains four key macroeconomic variables as endogenous variables. They are (1) real gross domestic product (GDP), (2) real exchange rate, (3) short-term interest rates, and (4) inflation. The specified GVAR model is estimated using quarterly data from 32 countries/regions from 1993Q4 to 2016Q4. The findings of this paper are consistent with theoretical predictions that external shocks can and will be transmitted to an open economy operating under a fixed or managed floating exchange rate system. For example, quantitatively, if the real output of Bangladesh's trading partners' falls by 1%, its output will fall by 0.39%, while the inflation rate of Bangladesh's trading partners' rises by 1%, and Bangladesh's inflation rate will increase by 1.38%. Although the negative output shock of the US economy will not significantly affect the Bangladeshi economy, the negative output shock of the Chinese economy will have a negative and significant effect on the Bangladeshi economy. The negative output shock on the US economy has caused the real exchange rate of Bangladesh's currency to appreciate and raised its short-term interest rate, although it is not statistically significant. Contrarily, a negative output shock to China or other economies devalues the real exchange rate of the Bangladeshi currency, although it is not statistically significant. However, Bangladesh's interest rates have not responded to negative output shocks from its trading partners (except the United States and Saudi Arabia), and they are not statistically significant. One policy implication of Bangladesh's inflation being overly sensitive to external inflation shocks is that Bangladesh can and should make its currency exchange rate more flexible to protect its economy from external price shocks. Unexpectedly, the external oil price shock did not seem to have a significant impact on the Bangladeshi economy. One explanation is that the impact of foreign inflation on Bangladesh's economy may have reflected the impact of oil prices.

THE EFFECTS OF U.S. MONETARY POLICY UNCERTAINTY SHOCK ON INTERNATIONAL EQUITY MARKETS

In this study, we quantify the propagation effects of the U.S. monetary policy uncertainty (MPU) shock on real equity prices of 33 advanced and emerging countries over the period 1980Q1 to 2019Q4. We employ a large-scale global vector autoregressive (GVAR) model which simultaneously accounts for country-specific macroeconomic conditions as well as regional and global trade and financial linkages among the countries. We show that the U.S. MPU shock spreads negative (but temporary) effects on the real equity prices, albeit with greater impacts on the advanced markets than their emerging counterparts owing to the greater connections of the former with the U.S. economy. Our results hold important implications for portfolio investors and policymakers.