GVAR Model Research Articles

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.

Dynamics of inflation in emerging markets: Is it local or global?

This paper investigates inflation dynamics in emerging markets. We apply a multi-country model (GVAR) and a time-varying Granger causality test (TVGC) to examine the drivers of inflation in Brazil, China, India, Indonesia, South Africa, and Türkiye over the period 1980Q1-2022Q4. The aim is to ascertain whether these drivers are locally or globally determined and vary over time. The GVAR model results indicate that local and global factors drive domestic inflation, collectively contributing to inflationary pressures in emerging countries. The TVGC results, on the other hand, provide strong evidence of the causality from local and global factors to domestic inflation. Local factors appear to have a stronger influence than global ones, suggesting that local dynamics play a more significant role in explaining inflation in these countries. Consequently, globalization and economic/trade integration, seen as tools to suppress inflation, can turn into factors that cause inflation in the face of a supply shock such as the one caused by the pandemic.

Countervailing impacts of fossil fuel production and exports of electrical goods on energy transitions and climate change

We analyze the implications of fossil fuel production by the U.S. and increasing exports of electrical goods by China on critical mineral prices, energy transitions, and climate change. Using a GVAR model from July 2012 to December 2019, encompassing 12 economies, we employ the dominant unit model and structural identification of shocks. Our findings reveal that increased U.S. fossil fuel production leads to a rise in global CO2 emissions, hampers domestic energy transitions, and triggers changes in critical mineral markets. Fossil fuel emerges as the primary external factor influencing national energy matrices and carbon emissions, highlighting spillover effects from the U.S. energy matrix on the global economy. While U.S. fossil fuel production negatively impacts energy transitions over the long term, Chinese exports of electrical goods contribute to cleaner energy production. These countervailing forces suggest that the global transition to clean energy may occur, but it will be slow. We discuss policy implications, which should: i) promote international trade by reducing protectionist policies and establishing multilateral or bilateral agreements; ii) incentivize the adoption of clean energy; and iii) diminish the incentive to use fossil fuel energy through fiscal and tax policies.

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.

The interconnectedness of European Banking and Shadow Banking for sustainable development goals: Insights from a network GVAR model

The goal of this study is to examine the interdependencies between the banking sector and shadow banking sector in selected European economies through the lens of sustainable development. Using a node-theoretic structure and a network GVAR model, we investigate the relationship between these sectors in a Sustainable Development Goals (SDGs) framework. With this in mind, we examine the interlinkages between the various economies, using a network GVAR model so as to examine the potential dominance of some entities in the system. We conclude that in Europe there are two important financial systems operating simultaneously: one is the European system, where Germany plays a leading role, and the other is the United Kingdom. Analytically, a shock to the banking sector of the European economies will have an impact on the shadow banking sector of the other European economies, whereas shocks to the shadow banking assets of the individual European economies will not have a statistically significant impact on the banking assets of the other European countries. Moreover, shocks in the British banking system significantly impact the European shadow banking assets, while shocks in the shadow banking assets of European member states do not significantly affect the British GDP, suggesting the importance of cross-border collaborations in SDG efforts. By exploring the interdependencies between European banking and shadow banking sectors, this study contributes to the understanding of how financial systems can influence sustainable development. The findings emphasize the significance of fostering innovation across borders and leveraging international interactions to achieve the SDGs.

Economic conditions and health: Local effects, national effect and local area heterogeneity

We study the relationship between health and changing economic conditions in local areas using a GVAR model that allows for dynamic and interdependent responses to local and national economic conditions. We examine quarterly British data for 2002–2016 for 131 local areas, which displays considerable heterogeneity in economic conditions. We find robust evidence that health improves as the local economy (employment) expands, but that it takes over 2 years to realise the full effect. This relationship holds for musculoskeletal, cardiovascular, respiratory, and mental health conditions. We find considerable response heterogeneity at the local area level with the strongest relationship between changes in economic conditions and health found for areas with more traditional industrial structures.

Ripple effect: Disentangling the global impact web of US monetary policy

This paper uses a GVAR model to analyze the direct and indirect (via commodity prices and cross-country interactions) spillover effects of US monetary policy on foreign economies and the ensuing spillbacks to the US. A ten basis points cut in the US interest rate directly boosts an average foreign economy's output by 0.06 percentage points, but indirect effects amplify this to 0.47 percentage points. These findings underscore that the recent increase in spillovers is primarily driven by global, rather than US-specific, integration. Indirect cross-country effects are most pronounced in financially open countries, regardless of their exchange rate regime.

The effects of a shock to critical minerals prices on the world oil price and inflation

Critical minerals (CMs) such as lithium, cobalt, nickel, and rare earth metals, are essential to the development of clean energy technologies, electronics, and defense and space industries, among others. Demand for these minerals is expected to grow quickly as energy transitions accelerate. As the post-pandemic economic recovery demonstrated, disturbances in CM supplies can also create serious bottlenecks in global supply-chains. In this study, we develop a GVAR model that can examine the consequences of market disturbances from CM price shocks on major global and country-specific macroeconomic indicators. Counterfactual simulations of a CM price shock suggest that that CMs, as a rising industry, are starting to have an impact on the macro level. The industry and its impacts are not fully developed yet but appear to have diverse implications across countries similar in some respects to the current major commodity – oil. A CM price shock has statistically significant implications for inflation in the UK and South Korea. At the same time, geopolitical shocks to crude oil prices have significant implications for CM prices. The cross-price elasticity of oil with respect to CM prices is positive in the United States, where CM's and oil are substitutes, and negative for Saudi Arabia where CMs and oil are compliments. These scenarios indicate the unsuitability of a one size fits all energy policy and a need for closer examination of the national and country specific relationships between the oil and CM sectors.

Global spillover impact of US monetary shocks on China–based on empirical test of GVAR model

This paper builds an open country theoretical model to analyse the spillover impact of the US monetary policy tightening shock on China’s economy. GVAR empirical model is employed combined with 22 countries and obtain three main results. First, the US monetary tightening shock causes the rise of the international risk index and the bilateral real exchange rate (the appreciation of the US dollar and the depreciation of the RMB). Second, both China’s current account and China’s capital outflow show the increased trends combined with the weighted role of foreign economies. Third, as the negative effect of China’s capital outflow is higher than the positive effect of China’s current account, China’s real output declines caused by the US monetary tightening shock.

Financial asymmetries between Euro area and the United States: An international political economy perspective

This paper assesses financial asymmetries between the Euro area and the United States using a financial accelerator framework. We estimate a GVAR model from 1995Q1 to 2016Q4 and find (i) that American financial shocks have a global influence whereas those of the Euro area are regional and (ii) that American financial shocks have larger effects in size than those of the Euro area. We develop an International Political Economy framework based on the concept of asymmetrical interdependence to point out policy suggestions whose main objective is to increase the autonomy of the Euro area.

EXTERNAL SHOCKS PASS-THROUGH INTO SELECTED CENTRAL AND EASTERN EUROPEAN COUNTRIES

The ongoing COVID-19 pandemic put further pressure on the economies, both at individual and global level and, amid already existing vulnerabilities, worsened the economic prospects. As a result of the negative effects of these tensions in tandem with global value chains disruptions, commodities’ prices increased, leading to strong inflationary pressures around the globe. Given possible permanent effects on inflation expectations, it is therefore questionable how fast those prices are to be stabilized. In this context, this paper focuses on a group of 10 European countries, namely Czechia, Hungary, Poland, Romania, France, Germany, Italy, Spain, the Netherlands and the United Kingdom, in the period spanning from 2005 to 2020. By implementing a GVAR model, the study analyses the pass-through of the external shocks stemming mainly from the Euro Area and the US to the CEE region, comparing the responses obtained for these countries with the ones of the developed economies. Considering the strong trade relationships between the analysed countries, the considered transmission channel is the commercial one. The results indicate that a supply shock in the Euro Area has a significant negative impact on the selected CEE countries’ economic growth, the offsetting factors not being strong enough to diminish the response.

One size may not fit all: Financial fragmentation and European monetary policies

AbstractThis article investigates the impact of European Central Bank policies on credits considering financial and banking fragmentation. Using European data from the past decade, we estimate SVAR models to analyze the regional impact of conventional and unconventional measures on price and volume indicators of fragmentation. The risk‐taking channel is studied using GVAR models to document the national consequences of this fragmentation. We find that unconventional measures increase credit in peripheral countries. Monetary policies alleviate fragmentation, but mostly in terms of price dispersion rather than credit volume. Finally, unconventional measures imply a rebalancing of European bank assets in favor of foreign currency denominated‐assets.

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.

Crisis and the Chinese miracle: A network—GVAR model

AbstractThe present paper examines how the Chinese economy has managed to maintain its overall economic growth, and therefore its production, throughout the various crises, that is, the global crisis of 2007 and the E.U. structural crisis . The paper sets up a network‐global vector autoregressive (GVAR) model that is estimated simultaneously for all the economies in the model, capable of uncovering the dominant entities in the network system, in the time period 1992‐2017. According to our findings, the economies of the United States and EU17 are found to exhibit a dominant role in the GVAR system, which is confirmed using both node theory as well as econometric techniques. The results show that the Chinese economy is unaffected, in the long run, by unanticipated shocks in the dominant economies of the United States and EU17.

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.

Forecasting air passenger numbers with a GVAR model

This study employs a GVAR model on the passenger numbers of the top 20 busiest airports of the world and the Asia-Pacific and Latin America-Caribbean regions. With air passenger numbers representing a demand measure, country-level proxies for economic drivers are included as domestic and foreign variables. In terms of ex-ante forecast accuracy, the GVAR model performs best for several airports – yet not for the entirety of airports – compared to four benchmarks for horizons one and three quarters ahead. It also achieves several second and third ranks for these and two other horizons and when all horizons are evaluated jointly. Considering the connectivity of airports is worthwhile to achieve accurate and economically interpretable air passenger demand forecasts.

Обзор зарубежного опыта по оценке влияния качественных показателей на экономические процессы с использованием моделей векторной авторегрессии (Review of Foreign Experience in Assessing the Impact of Qualitative Indicators on Economic Processes Using Vector Autoregression Models)

Russian Abstract: В данной работе првощится анализ использование глобальной векторной авторегрессии в современной международной торговле, а также в мировой экономике в целом для оценки эффективности экономических явлений и процессов.English Abstract: This paper presents the possibilities of using global vector autoregression models, which are used in the following cases: when assessing intercountry interdependencies, when assessing the effectiveness of any reforms in the country and their impact on the economy as a whole or on its individual indicators. In addition, the presented models can be used to assess the impact on the economy of a specific country or group of countries of changes in prices for hydrocarbon energy resources. In modern realities, GVAR models are used to assess the impact of the coronavirus pandemic on the global economy in general, and on individual countries.

An Analysis of International Shock Transmission: A Multi-Level Factor Augmented Time-Varying GVAR Approach

We develop and apply a new methodology to study the transmission mechanisms of international macroeconomic and financial shocks in the context of emerging markets. Our approach combines aspects of factor analysis and GVAR models by replacing the cross-unit averages that serve as foreign variables in the GVAR model with macroeconomic and financial factors extracted hierarchically from unbalanced panels of country-level data. Furthermore, we allow for time variation in both the model parameters and shock volatility. Our key empirical findings are as follows. First, we find that the macroeconomic conditions in the emerging economies under consideration became more sensitive to global financial conditions during and after the recent financial crisis. Moreover, they appear more concerned with financial stability as they do not try to offset the contractionary effects of tightening in global financial conditions by decreasing their policy rates. Second, deterioration of financial conditions in other emerging market country groups has a loosening effect on domestic financial conditions. Third, as we include a global financial risk factor along with the US monetary policy rate, our results suggest that the contractionary effects of US interest rate shocks are taken over by the global financial risk shock. Lastly, we find some evidence that macroeconomic interdependencies among emerging economies have been increasing while their dependencies on advanced economies have been decreasing over time.

Funding liquidity, credit risk and unconventional monetary policy in the Euro area: a GVAR approach

This paper investigates the transmission of funding liquidity shocks, credit risk shocks and unconventional monetary policy within the Euro area. To this aim, a financial GVAR model is estimated for Germany, France, Italy and Spain on monthly data over the period 2006-2017. The interactions between repo markets, sovereign bonds and banks' CDS spreads are analyzed, explicitly accounting for the country-specific effects of the ECB's asset purchase programmes. Impulse response analysis signals core-periphery heterogeneity and persistent flight to quality. A simulated reduction in any ECB programme ultimately results in rising yields and bank CDS spreads in Italy and Spain, as well as in falling repo trade volumes and rising repo rates in all four countries.

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.