Global Vector Autoregressive Model Research Articles

International spillover effects of unconventional monetary policies of major central banks

This study examines the effects of unconventional monetary policies (UMPs) by the major central banks, namely the Bank of England (BOE), Bank of Japan (BOJ), European Central Bank (ECB) and the Federal Reserve (Fed), on the international financial markets, taking global spillovers and monetary policy interaction into account. To this end, we applied the Global Vector Autoregressive (GVAR) model to 35 countries/economies and one region for the period from March 2009 to July 2019. In addition, we accommodated the smooth transition to the GVAR to consider possible structural changes in the effects of UMPs and monetary policy interaction. Our results indicate the importance of capturing structural changes, showing the remarkable difference between the beginning and end of the sample. For example, we found clear evidence of monetary policy coordination after the global financial crisis and less evidence of policy interaction in the recent period. Also, our results suggest that generally, the UMPs of the major central banks had stronger effects on both domestic and international bond markets in the earlier period. In contrast, the global equity markets responded more positively to the UMPs in the recent period, although there was no noticeable difference in the responses of domestic equity markets throughout the sample.

Fragmentation in the European Monetary Union: Is it really over?

Sovereign bond market fragmentation represents one of the major challenges European authorities have had to tackle since the outburst of the euro area debt crisis in 2010. By investigating the inter-country shock transmission through a new methodology that reconciles Factor and Global Vector Autoregressive models, we first show that fragmentation risk well preceded the sovereign debt crisis outburst. Most importantly, by analyzing the recent period, we document a rise in fragmentation risk in the euro area during the COVID pandemic. This rise, connected to the pressure on public debts and deficits due to the pandemic period, questions the European integration process and calls for early measures to avoid a new sovereign debt crisis.

The sensitivity of oil price shocks to preexisting market conditions: A GVAR analysis

This study develops a Global Vector Autoregression (GVAR) model to simulate various types of shocks to oil markets and to see whether such shocks are time-sensitive in oil markets. Our model extends the canonical Mohaddes and Pesaran (2016) model temporally (to 2018Q3), spatially (including Russia, Iran, and Venezuela), and by adding oil inventories as an additional country-specific variable. Two of its characteristics make GVAR particularly suited to this analysis. First, the GVAR framework is specifically designed to account for the interaction between many countries. Second, world oil supplies and inventories are modeled jointly with key global and country-level macroeconomic variables. The results indicate conditions existing in the markets prior to the disturbance determine the global economic implications of an oil price shock. To cite only one example, a negative price shock in markets characterized by loose inventories will have significant negative implications for real GDP in the consuming nations, specifically Europe Latin America, and the Asia Pacific. In tight markets, on the other hand a negative price shock has the potential to increase real GDP for the world as a whole.

Global evidence of the COVID-19 shock on real equity prices and real exchange rates: A counterfactual analysis with a threshold-augmented GVAR model

In this study, we offer a global perspective on the impacts of the COVID-19 pandemic on financial markets using a multi-country Threshold-Augmented Global Vector Autoregressive Model of Chudik et al. (2020). We document a negative impact of the pandemic on real equity prices across countries (except the United States) and country groupings with the highest negative impact recorded in 2020Q2. The biggest losers are the emerging economies while the biggest gainers are the United States whose real stock prices remain positive and the Euro Area that achieved real exchange rate appreciation when the financial markets were mostly vulnerable. Our results support the effectiveness of the quantitative easing policy regime in the Euro Area during the COVID-19 pandemic and also suggest hedging role for the US stocks among other suggested safe assets.

International monetary policy spillovers to emerging economies in Sub-Saharan Africa: A global VAR analysis

In this paper, we trace the transmission of monetary policy shocks from three prominent sources of global financial and trade shocks (US, Europe, and China) to the two largest emerging economies in Sub-Saharan Africa (SSA) (Nigeria and South Africa). To pursue this study's objective, we employ Global Vector Autoregression (GVAR) model and update the common GVAR database to accommodate selected SSA countries. We report impulse response functions obtained from the model to analyse the responses of inflation, exchange rate, interest rate, and output in the emerging SSA economies to monetary policy shocks emanating from the large open economies. We document some new findings on the relationship between international monetary policy and the behaviour of economic factors in the emerging SSA countries. First, we show that tight monetary policy in the US and EU moderates prices in Nigeria while it is inflationary in South Africa. Second, the impact of the same policy shock is positive and prolonged on the Nigerian Naira and South African Rand. Third, the monetary policy decisions in China and the US have greater influence on the monetary policy in Nigeria and South Africa compared to similar policy decisions in the EU.

A Note on the COVID-19 Shock and Real GDP in Emerging Economies

ABSTRACT In this study, we estimate a multi-country Threshold-Augmented Global Vector Autoregressive (TGVAR) model to analyze the response of real GDP of emerging economies (Brazil, India, China, and South Africa) with reference to selected advanced economies (US, UK, & Germany) to the COVID-19 shock. The result of the counterfactual analysis beyond the 2019Q4 indicates that the impact of COVID-19 shock on real GDP is pervasive and more prevalent in the developed than the emerging economies. Our model forecasts real GDP growth of emerging countries more precisely, but we attribute the shortfalls in the projections for advanced economies to the efficacy of fiscal and unconventional monetary policies to speed up the recovery in these countries.

Islamic stock markets and COVID-19-induced shocks: simulations with global VAR approach

PurposeThis paper aims to make the first attempt to study the transmission of COVID-19 pandemic-induced shocks to the global Islamic stock markets in the midst of the overall macroeconomic environment and cross-country trade linkages. This is made possible by constructing a global vector autoregressive (GVAR) model and with it the authors arrive at noteworthy conclusions.Design/methodology/approachThe paper estimates both fixed and time-varying weights GVAR models for 15 Islamic stock markets with 5,000 bootstrap replications and reports impulse response functions. It simulates four shocks associated with the pandemic: first, a standard error negative shock to oil price; second, a standard error negative shock to the global Islamic stock markets; third, a standard error positive shock to equity-based uncertainty index; and fourth, a standard error negative shock to economic activity (inflation).FindingsThe paper shows that the pandemic engenders immediate negative impacts on the Islamic stock markets with the biggest impacts borne by the USA and China and the least by markets in the Middle East. The study documents the magnitudes of the responses to the shocks and shows that the impacts of the pandemic will take about 20 months to wither completely.Originality/valueThe findings throw up diversification benefits for investors toward the UAE, Oman, Bahrain and other Middle East markets especially during crisis. It further reveals the need for counter-cyclical measures in all countries to curtail the negative impacts of the pandemic which could linger for up to 20 months.

Using 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 the Global Vector Autoregression Model (GVAR), to unite two differing perspectives on commodity markets, the single-market centered approach, investigating the micro- and macroeconomic drivers of commodity prices, as well as the inter-market perspective, which observes joint movements of commodity prices, beyond macroeconomic variables, on exchanges. The strong co-movement between industrial metal prices is represented exceptionally well by our framework, which connects the markets using co-consumption, co-production and co-trading data. While the microeconomic supply and demand attributes have no significant impact on individual market level, indicating a contradiction to the single-market centered approach, the cross-commodity dimension reveals these attributes are determining, even on price variables.

Investigating the Effects of the United States’ Economic Slowdown Related to the COVID-19 Pandemic on Energy Consumption in Other Countries—A Global Vector Autoregressive Model

The COVID-19 pandemic has caused a drop-in economic activity and energy consumption of the United States. This work aims to investigate the spillover effects of the United States’ COVID-19 economic recession on economic growth and energy consumption in other nations using a global vector autoregressive (GVAR) approach and quarterly data between 1990 and 2013 from 41 major countries/regions. On the one hand, the simulation results indicate that the US COVID-19 recession has a negative impact on other countries’ economic growth through trade ties, reducing the economic growth of other countries, especially for countries which have a close trade relationship with the US. In addition, the spillover effects of the US economic recession have different impacts on other countries’ energy consumption. Countries with the closest trade ties to the US are most affected, such as Japan and China. In addition, the impact of the US’ economic shock on energy consumption in developing countries is significant in the short term, while its impact on developed countries is significant in the long term. On the other hand, the simulation results of energy spillover effects indicate a reduction in US energy consumption slightly reduces economic growth in other nations. In addition, a reduction in energy consumption in the US does not have a significant negative impact on energy consumption in other developed countries. Furthermore, the spillover effect of declining energy consumption in the US on energy consumption in developing countries is significant in the short term. However, the spillover effects of falling energy consumption in the US on developing countries are different. The spillover effect of the decline in energy consumption in the US causes a slight decline in energy consumption in China and Brazil, whereas the spillover effect of the decline in energy consumption in the US does not cause a decline in energy consumption in India and Brazil.

The transmission of international shocks to CIS economies: A global VAR approach

This paper employs a Global Vector Auto Regressive (GVAR) model to study the evolution of the response of the Commonwealth of Independent States (CIS) to foreign output and oil price shocks. During an observation period of two decades, cross-country trade and financial linkages experience notable changes. We find CIS countries to be highly sensitive to global and regional shocks, with that sensitivity increasing after the global financial crisis. CIS countries show the strongest responses to output shocks originating in the US, Russia and within the region itself, but their sensitivity to euro area shocks also increases substantially. Despite growing trade relations with China, the responses of CIS countries to output shocks originating in China are still relatively moderate.

Forecasting mortality with international linkages: A global vector-autoregression approach

This paper proposes a Global Vector Autoregression (GVAR) mortality model to simultaneously model and forecast multi-population mortality dynamics. The proposed GVAR model decomposes the global regression model into population-wise local systems. Each local system consists of an intra-population autoregressive component and a small set of global factors, which contain systematic mortality information of all populations. Such a decomposition substantially reduces the extra estimation cost of including new populations compared to unconstrained VAR models, and makes the GVAR model an efficient tool for analyzing the joint mortality dynamics of a large group of populations. Further, under fairly general assumptions, the proposed GVAR model could generate coherent mortality projections between any two ages in any two populations. Using single-age mortality data of 15 low-mortality countries, we find that the global factors have substantial explanatory and forecasting power of mortality changes of individual populations, and the proposed GVAR model could produce satisfying mortality forecasts under various settings.

Macroeconomic Consequences of Covid-19 in a Small Open Economy: An Empirical Analysis of Nigeria

Nigeria is a small open economy with a high level of external dependency especially on the export of crude oil for foreign earnings and government revenue and import of consumables goods including pharmaceutical products. Currently, China and USA contribute more than 35% of Nigerian total import and in addition with Euro area constitute top export destinations of Nigerian crude oil. Studies in the past have investigated the vulnerability of Nigerian economy to external shocks, however, the emerging shocks from global economy due to COVID-19 seems unprecedented. Thus, it is imperative to preemptively examine the likely spillover effects of COVID-19 pandemic to a small open economy like Nigeria based on shocks to strategic trade partners. Given this background, this study investigates the macroeconomic consequences of COVID-19 in China, the Euro area and United States of America (USA) in Nigeria using Global Vector Autoregressive (GVAR) approach. This modelling approach provides an opportunity to analyze international macroeconomic transmission of shocks and spillovers between different countries. It also provides a framework to offer adequate tools to deal with the curse of dimensionality that may arise during the analysis. Macroeconomic variables such as exchange rate, economic growth, inflation rate, trade flows and consumers’ spending were employed from Nigeria and other COVID-19 infected partner countries to build the GVAR model. Similarly, variable such as oil price and world commodity price index served as global variables. These variables were introduced quarterly to obtain stable behavioural interactions. Subsequently, simulations were performed to capture economic reality of COVID-19 and policy reactions in COVID-19 infected partner countries. The study identified output and inflation shocks in USA and China as important external shocks to the Nigerian economy however, oil price shocks constitute the biggest external threat to the economy during and post COVID-19 era. © 2021 Penerbit Universiti Kebangsaan Malaysia. All rights reserved.

Variations in the Effects of a Single Monetary Policy: The Case of Russian Regions

This research analyses regional heterogeneity in the reaction of core inflation to shocks of a single monetary policy on the example of Russia. We use a global vector autoregression model to reveal impulse response functions of core inflation in Russian regions to monetary policy shocks. The average 5-year cumulative response of regional core inflation to a MIACR shock of 1 percentage point (pp) is ‒0.74 pp. For 77 out of 80 regions, the 5-year cumulative core inflation response is found to be statistically significant. If we exclude three statistically insignificant responses and discard the four regions with the highest and lowest responses, we get a spread of ‒0.55 to ‒0.93 pp with a standard deviation of 0.12. We show that, over a one-year horizon, the heterogeneous response to monetary policy shocks can moderately reduce the heterogeneity of the response of regional inflation to exchange rate shocks. However, the magnitude of this effect is limited. According to the analysis of the regional heterogeneity factors, the higher are the share of extractive industries in the gross regional product of a region, the share of loans to manufacturing sector, the share of loans to small enterprises, as well as the unemployment rate, the stronger will be the reaction of the core inflation to the monetary policy shock. The degree of heterogeneity in the Russian regions’ core inflation response to monetary policy shocks, the set of factors explaining this heterogeneity, and the explained variation in the regional response (30–40% depending on the model specification) turn out to be comparable to similar indicators in other countries with pronounced regional heterogeneity.

Assessing the impact of COVID-19 on global fossil fuel consumption and CO2 emissions

We assess the effect of the COVID-19 pandemic on global fossil fuel consumption and CO2 emissions over the two-year horizon 2020Q1-2021Q4. We apply a global vector autoregressive (GVAR) model, which captures complex spatial-temporal interdependencies across countries associated with the international propagation of economic impact due to the virus spread. The model makes use of a unique quarterly data set of coal, natural gas, and oil consumption, output, exchange rates and equity prices, including global fossil fuel prices for 32 major CO2 emitting countries spanning the period 1984Q1–2019Q4. We produce forecasts of coal, natural gas and oil consumption, conditional on GDP growth scenarios based on alternative IMF World Economic Outlook forecasts that were made before and after the outbreak. We also simulate the effect of a relative price change in fossil fuels, due to global scale carbon pricing, on consumption and output. Our results predict fossil fuel consumption and CO2 emissions to return to their pre-crisis levels, and even exceed them, within the two-year horizon despite the large reductions in the first quarter following the outbreak. Our forecasts anticipate more robust growth for emerging than for advanced economies. The model predicts recovery to the pre-crisis levels even if another wave of pandemic occurs within a year. Our counterfactual carbon pricing scenario indicates that an increase in coal prices is expected to have a smaller impact on GDP than on fossil fuel consumption. Thus, the COVID-19 pandemic would not provide countries with a strong reason to delay climate change mitigation efforts.

What drives international tourism development in the Belt and Road Initiative?

As an important part of modern service, international tourism has created possibilities for employment and improvement in the balance of payments in receiving countries. This has also strengthened the degree of economic dependence among regions. In the context of international economic diversification, industrial integration, and globalization, the development of a domestic international tourism industry for a given country is inevitably affected by the performance of foreign economies. Therefore, the relationship between economic growth and tourism development has always been of primary interest in tourism economics. In order to study the dynamic relationship between regional economic growth and international tourism revenue along the Belt and Road Initiative, this study examines the annual country-level data from 1995 to 2017. A global vector autoregressive model (GVAR) is estimated, along with the impulse response and variance decomposition, to explain the interaction effect between China and other regions. The impulse response analysis shows that local economic growth has significant shock and spillover effects on international tourism revenue in the other regions, but these effects are heterogeneous across regions and do not always show positive cyclical synchronization. Results of the variance decomposition show that China's economic growth has increasingly contributed to international tourism revenue in other regions, and that the interdependence of countries' tourism demand has become stronger. Therefore, countries along the Belt and Road Initiative should strengthen their economic cooperation, reduce barriers to tourism trade, and dynamically adjust the regulatory policies of the international tourism industry. Additionally, these countries should jointly promote the interactive development of regional economies and the international tourism industry. • The Belt and Road initiative is considered. • International tourism revenue is analyzed. • Global VAR is applied for 36 countries. • Determinants and outcomes of international tourism are identified.

COVID-19, Macroeconomic Dynamics and Fear in Europe: A Network Global VAR Approach

The COVID-19 pandemic has exerted severe impacts on the socioeconomic fabric of worldwide countries, spreading financial and economic instability, affecting sentiment of market participants and institutions, and causing an unprecedented epidemic-related economic crisis. Interconnectedness is a key determinant for the spread of a crisis in the network structure of entities, as large shocks tend to propagate to the economy in its complexity. In this paper we combine the statistical and econometric literature concerning generalized forecast error variance decomposition (GFEVD) with network science to study the topology of spillover indices across countries, macroeconomic variables and economic sentiment data. To this aim, we propose a dynamic network framework derived from a Global Vector Autoregressive model (GVAR), a suitable macroeconometric model to consider simultaneous multi-level interdependencies across variables, which we analyse through the lens of network theory. We apply our methodology to study the interrelated dynamics of a set of European countries' by looking at the Industrial Production, the Retail Trade and the Economic Sentiment indexes over the period 01/2000-03/2021. Our main results show how different crises exert diverse impacts on real economy, economic sentiment and on the entire countries' macroeconomic network structure. While the aggregate impact of the Global Financial Crisis on the network interrelationships in Europe is approximately the same in terms of global spillover magnitude as that induced by the COVID-19 outbreak, the latter seems to be more persistent over time, and with starkly diverse implications on the temporal network structure. We also demonstrate that, overall, economic sentiment tends to be an informationally dominant node in the network over real economic variables, even during the Global Financial Crisis period. However, the two components have recently swapped their roles due the COVID-19 outbreak, meaning that such a large, unexpected, and non-financial shock has allegedly caused the real economy to dominate macroeconomic expectations.

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 18 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 the Connectedness of the Global Economy

We develop a technique to exploit forecast error variance decompositions to evaluate the macroeconomic connectedness embedded in any multi-country macroeconomic model with an approximate vector autoregressive (VAR) representation. We apply our technique to a large global VAR model covering 25 countries and derive vivid representations of macroeconomic connectedness. We find that the US exerts a dominant influence in the global economy and that Brazil, China, and the Eurozone are also globally significant. Recursive analysis over the period of the global financial crisis shows that shocks to global equity markets are transmitted rapidly and forcefully to real trade flows and real GDP.

FROM MULTILATERALISM TO MULTI-POLARISM: A STUDY OF TRADE SHOCK TRANSMISSION BETWEEN SELECTED AFRICAN ECONOMIES, THE BRIC AND THE REST OF THE GLOBAL ECONOMY

This study investigates trade shock transmission between selected African countries, the BRIC and the rest of the global economy with a view to understanding the likely disposition of African economies towards multilateralism in the years to come. The study extends the network approach of Diebold and Yilmaz [( 2009 ). Measuring financial asset return and volatility spillovers, with application to global equity markets. The Economic Journal, 119(534), 158–171, https://doi.org/10.1111/j.1468-0297.2008.02208.x ] by constructing generalized trade linkage measures at various degrees of aggregation using generalized forecast error variance decompositions of an underlying global vector autoregressive model. The results indicate that the trade linkage between Africa and the rest of the global economy is substantial, with the total trade linkage index having an average value of 87%. We find that China, USA, UK, Japan, EU and Canada dominate Africa’s trade and therefore have the potential to spread trade shocks to it. The results further indicate that apart from the BRIC, other regional trading blocs such as Asia, the Americas, and Europe play influential roles in Africa’s trade. Overall, the findings show that African economies are predominantly net receivers of trade shocks originating from the aforementioned dominant sources. We conclude that these patterns of cross-country trade shock spillovers, coupled with the ongoing challenges of legitimacy facing the World Trade Organisation, would likely influence Africa’s move from multilateralism to multi-polarism in the years to come.

International Vulnerability of Sub-Saharan African Countries with Fixed Exchange Regimes

The fast-growing of the sub-Saharan Africa (SSA) countries over the past decade highlight that successful economic integration can assume many forms, instead of standard patterns. In this sense, this paper provides empirical evidence of the vulnerability of the West African Economic and Monetary Union (WAEMU) and Cape Verde, that adopted fixed exchange rate regimes. For this reason, we developed a global vector autoregressive GVAR model, a data shrinkage procedure, where large sets of variables are reduced to a small set of factors. It allows describing systems of higher dimensional complexities and simulating shocks in a cross-regional approach with the use of common factors. First, we specified and identified a weight matrix for the selected countries, used to reproduce this policy framework, conditioning the parameters to an interdependent trading structure. Next, a variety of tests were estimated, e.g., stationarity, structural break tests and exogeneity tests. We use the generalized impulse response functions to simulate shocks originating from European Monetary Union (EMU), China and the United States (US) on GDP, the CPI, the interest rate and the exchange rate of the SSA countries. Our results were also controlled by the productivity structures of the countries, characterized as agricultural-exporting, commodity-importing, commodity-exporting, and trading based types. In decreasing order of magnitude, shocks originating from Europe (-0.94%), China (-0.73%) and the US (-0.25%) led to a persistent decrease in the GDP and to depreciation of the exchange rate of the region. However, they were not significant for inflation. Shocks in interest rates suggest passive monetary policy. While our empirical evidence does not indicate distinct effects of shocks emanating from the economy-type structures, it points out that these structures are clearly vulnerable to external shocks. To reduce uncertainties and transaction costs from the EMU, SSA countries may consider gradually abandoning the fixed exchange rate regime with the Euro in the medium term and anticipate the development of new multilateral trade agreements. In the long term, it is highly indicated that these countries invest in export diversification and structural transformation.