GVAR Model Research Articles

The Impact of China Exchange Rate Policy on its Trading Partners: Evidence Based on the GVAR Model

This study is designed to investigate the impact of China exchange rate policy on its trading partners by using a country multi-dataset GVAR model. Our model includes samples of 30 countries, six from high-income, six from middle-income and eighteen from low-income countries. This study used annual time series data over the period 1992 to 2017. We constructed currency misalignment index and it provided some interesting features about the currency undervaluation and overvaluation. The results of the currency misalignment shows that China’s Renminbi is structurally more undervalued over the sample period as compared to other countries, and fluctuation in major currencies effects the global trade around the world. The overall empirical results of the GVAR model indicate that RMB undervaluation affects the trade pattern and macroeconomic performance of China’s trading partners. Overall, China’s exchange rate undervaluation has mixed effects on trading partner’s GDP, exports and imports. The devaluation of China’s RMB efficiently stimulated China’s exports and reduced imports. While, in some countries, this effect is reverse, the RMB undervaluation increases the GDP of partner countries and also increases their exports to China. The results confirm the strong and leading role of the Chinese Renminbi in the global trade.

Preventing a European Banking and Financial Crisis after the COVID-19 Health Crisis: Lessons from the Last Decade

This paper investigates the impact of ECB policies on credits considering financial and banking fragmentation for member countries. Using European data from the past decade, a period characterised by growing fragmentation, we estimate regional SVAR models to study the impact of conventional and unconventional measures on price and volume indicators of fragmentation. The risk-taking channel is studied using GVAR models in order to document the consequence of financial fragmentation at the national level. We find that unconventional monetary policies increase credit volumes in peripheral countries. In addition, monetary policies can alleviate financial and banking fragmentation, but mostly in terms of price dispersion rather than credit volume. Finally, unconventional monetary policies increase capital outflows outside the Eurozone.

Regional effect of monetary policy based on GVAR model and machine learning

Monetary policy is an important means for a country to regulate macroeconomic operations and achieve established economic goals. Moreover, a reasonable monetary policy improves the efficiency of financial operations on a global scale and effectively resolves the financial crisis. At present, scholars from various countries have begun to pay attention to the issue of differentiated formulation of monetary policy among regions. This paper combines machine learning to construct a monetary policy differentiation effect analysis model based on the GVAR model. Moreover, this paper uses the gray correlation analysis method to obtain the gray correlation matrix between industries, and then introduces the industry’s own characteristics, industry relevance and macroeconomic factors into the macro stress test of credit risk. In addition, this paper constructs a conduction model based on the industry GVAR model, and uses the first-order difference sequence of GDP growth rate, CPI growth rate and M2 growth rate of each economic region to construct a GVAR model to test the impulse response function. The results of the test show that the monetary policy shocks of various economic regions are significantly different. All in all, the research results show that the performance of the model constructed in this paper is good.

An Event Study of COVID-19 Central Bank Quantitative Easing in Advanced and Emerging Economies

This paper conducts an event study of 30 quantitative easing (QE) announcements made by 21 central banks on daily government bond yields and bilateral US dollar exchange rates in March and April 2020, in the midst of the global financial turmoil triggered by the COVID-19 outbreak. The paper also investigates the transmission of innovations to long-term interest rates in a standard GVAR model estimated with quarterly pre-COVID-19 data. We find that QE has not lost effectiveness in advanced economies and that its international transmission is consistent with the working of long-run uncovered interest rate parity and a large dollar shortage shock during the COVID-19 period. In emerging markets, the QE impact on bond yields is much stronger and its transmission to exchange rates is qualitatively different than in advanced economies. The GVAR evidence that we report illustrates the Fed's pivotal role in the global transmission of long-term interest rate shocks, but also the ample scope for country-specific interventions to affect local financial market conditions, even after controlling for common factors and spillovers from other countries. The GVAR evidence also shows that QE interventions can have sizable real effects on output driven by a very persistent impact on long-term interest rates.

Investigating interior driving factors and cross-industrial linkages of carbon emission efficiency in China's construction industry: Based on Super-SBM DEA and GVAR model

Abstract Global warming, resulted from greenhouse gases emission, has significant impacts on natural ecosystem and economic development. Construction is a leading industry in China's economy with high carbon emissions. Improving the carbon emission efficiency and investigating the driving factors of carbon emission efficiency in China's building industry are very important for the sustainable development of construction industry and the goal of China's carbon emission reduction. This paper measures the total-factor carbon emission efficiency of construction industry from 2003 to 2016 by applying Super-SBM DEA approach. Then the interior driving factors and cross-industrial shock effects of carbon emission efficiency are investigated by industry GVAR model. Empirical results show that the carbon emission efficiency in China's construction industry is low with a downward trend. With regard to interior driving factors, technological progress and energy structure adjustment can promote the carbon emission efficiency of construction industry, but the economic scale with extensive development mode exerts a certain negative influence. From the perspective of cross-industrial driving factors, economy scale, energy structure and technological progress play an important role in the carbon emission efficiency in manufacturing and electricity/gas/water industry, while relatively faint in other industries. Inter-industrial economy scale and energy structure except for transportation industry exert negative effects on carbon emission efficiency, whereas the impacts of exterior technological progress of other industries except for the mining industry are positive. In order to promote industrial carbon emission efficiency, the carbon reduction mechanism for the common but differentiated responsibilities among industries should be established.

Analysis of Economic Shock Effects between China and ASEAN: An Empirical Study Based on Multinational VAR

ABSTRACT This paper investigates the interaction mechanism of economic and trade shocks between ASEAN (Association of Southeast Asian Nations) and China by building a GVAR model. The results indicate that the effects of China’s economic shocks on ASEAN are more distinct than ASEAN’s shocks on China. Negative shocks on China’s growth rate produce negative effects on ASEAN’s economic growth rate. The positive inflation shocks to China’s economy produce long-lasting and prominent impacts on ASEAN’s inflation rate and raise ASEAN’s import and export rate. When China’s export growth rate suffers a negative shock, ASEAN countries’ economic growth rate declines. When ASEAN countries suffer a negative shock, the effects on China’s growth rate, foreign trade, and inflation are quite moderate, but the renminbi depreciates rapidly.

Measuring the effect of monetary shocks on European sovereign country risk: an application of GVAR models

ABSTRACTThis paper investigates the effect of European monetary policies on Eurozone countries’ sovereign risks. We control for interdependencies across individual variables within and across countries using a global VAR specification weighting transmission by their fiscal position. We find evidence of positive correlation between sovereign bond CDS and risk aversion for almost all countries in the Eurozone. The effects are larger after the 2012 Greek debt crisis. When the ECB increases its refinancing rate or there is a decline in money aggregates (i.e., M3), we observe an increase in sovereign bonds’ risk of all countries (except Greece). In contrast, monetary policy tightening shocks have the opposite impact on Greece due to a differentiation effect.

Modelling the interdependence of tourism demand: The global vector autoregressive approach

This study develops a global vector autoregressive (global VAR or GVAR) model to quantify the cross-country co-movements of tourism demand and simulate the impulse responses of shocks to the Chinese economy. The GVAR model overcomes the endogeneity and over-parameterisation issues found in many tourism demand models. The results show the size of co-movements in tourism demand across 24 major countries in different regions. In the event of negative shocks to China’s real income and China’s tourism price variable, almost all of these countries would face fluctuations in their international tourism demand and in their tourism prices in the short run. In the long run, developing countries and China’s neighbouring countries would tend to be more negatively affected than developed countries.

Tourism expenditures and crisis transmission: A general equilibrium GVAR analysis with network theory

According to the World Tourism Organization, during the last decades, tourism has become one of the largest and most dynamic economic industries in the world. In this work, we employ a Network General Equilibrium GVAR model to analyze the impact of tourism expenditures on GDP and our approach allows for the existence of dominant economies in the system. The model is estimated simultaneously as a system of equations for a large panel of world economies and the results show that the less developed economies are quite vulnerable to changes in the tourism expenditures of the dominant economies. Meanwhile, USA is found to be largely unaffected by shocks in the tourism expenditures of the less developed economies.

China's slowdown and global financial market volatility: Is world growth losing out?

China's GDP growth slowdown and a surge in global financial market volatility could both adversely affect an already weak global economic recovery. To quantify the global macroeconomic consequences of these shocks, we employ a GVAR model estimated for 26 countries/regions over the period 1981Q1 to 2013Q1. Our results indicate that (i) a one percent permanent negative GDP shock in China (equivalent to a one-off one percent growth shock) could have significant global macroeconomic repercussions, with world growth reducing by 0.23 percentage points in the short-run; and (ii) a surge in global financial market volatility could translate into a fall in world economic growth of around 0.29 percentage points, but it could also have negative short-run impacts on global equity markets, oil prices and long-term interest rates.

Spillover effects of debt and growth in the euro area: Evidence from a GVAR model

This paper employs a global vector autoregression model to analyze two-way spillover effects of public debt and growth between Germany as the largest economy of the euro zone and its core and periphery groups of countries. Using quarterly data over the period 1991Q1-2014Q4, we find that positive growth shocks originating in any of the three entities spill over into higher growth rates in the other regions of the euro area, and also reduce debt levels at least transitorily in all regions. In contrast, debt shocks exert no significant impact on the growth dynamics across the euro zone, but spill over to the debt levels of the other regions through increases in real interest rates, particularly for shocks emanating from the euro area core and periphery.

Does joint modelling of the world economy pay off? Evaluating global forecasts from a Bayesian GVAR

We analyze how modeling international dependencies improves forecasts for the global economy based on a Bayesian GVAR with SSVS prior and stochastic volatility. To analyze the source of performance gains, we decompose the predictive joint density into its marginals and a copula term capturing the dependence structure across countries. The GVAR outperforms forecasts based on country-specific models. This performance is solely driven by superior predictions for the dependence structure across countries, whereas the GVAR does not yield better predictive marginal densities. The relative performance gains of the GVAR model are particularly pronounced during volatile periods and for emerging economies.

Forecasting with Global Vector Autoregressive Models: a Bayesian Approach

SummaryThis paper develops a Bayesian variant of global vector autoregressive (B‐GVAR) models to forecast an international set of macroeconomic and financial variables. We propose a set of hierarchical priors and compare the predictive performance of B‐GVAR models in terms of point and density forecasts for one‐quarter‐ahead and four‐quarter‐ahead forecast horizons. We find that forecasts can be improved by employing a global framework and hierarchical priors which induce country‐specific degrees of shrinkage on the coefficients of the GVAR model. Forecasts from various B‐GVAR specifications tend to outperform forecasts from a naive univariate model, a global model without shrinkage on the parameters and country‐specific vector autoregressions. Copyright © 2016 John Wiley & Sons, Ltd.

Bayesian GVAR with k-endogenous dominants & input–output weights: Financial and trade channels in crisis transmission for BRICs

In this work, we study the transmission of shocks (e.g. financial, monetary) between countries by developing a novel approach which relies on Bayesian techniques in order to estimate the GVAR model as a system of simultaneous equations, which we call Bayesian System GVAR (BSGVAR), while providing two procedures to select the dominant economies. Also, we use endogenously determined time varying weights with random coefficients. In this context, we utilize the proposed model to a selected panel of world economies that account for more than 90% of global production. Our work identifies and estimates the link between countries based on the global variables of trade and finance, which act as the transmission channels that have been documented in the literature as being important. To this end, we investigate how the dominant economies of USA and EU17 will be affected by a potential slowdown in the BRICs. Consistent with international evidence, the empirical findings show that both monetary and financial variables, such as interest rates and total credit, have a significant impact on the transmission of shocks. According to our findings, the EU17 economy seems to be more vulnerable than the US economy to shocks from the BRICs.

Credit, asset prices and business cycles at the global level

This paper assesses the role of financial variables in real economic fluctuations, in view of analysing the link between financial cycles and business cycles at the global level. A Global VAR modelling approach is used to first assess the contribution of credit and asset price variables to real economic activity in a number of countries and regions. The GVAR model is based on 38 countries estimated over 1987–2013. An analysis on a sample excluding the post-financial crisis period is also provided to check whether financial variables have gained importance in explaining business cycle fluctuations over the recent past. In a second step, financial shocks are identified through sign restrictions in order to illustrate how financial and business cycles could be related. Overall, the paper shows that the importance of credit and asset price variables in explaining real economic fluctuations is relatively large, but has not significantly increased since the global financial crisis. The international transmission of financial shocks on business cycle fluctuations also tends to be large and persistent.

Forecasting global recessions in a GVAR model of actual and expected output

We compare a Global VAR model of actual and expected outputs with alternative models for assessing the roles of cross-country interdependencies and confidence in forecasting. Forecast performances are judged on point and density forecasts of growth, on probability forecasts of the occurrence of national and global recessionary events, and, through a novel ‘fair bet’ exercise, on decision-making using probability forecasts. We find that multi-country and survey data are required in order to capture the influence of global interactions and expectations in forecasts fully. We argue that output predictions should avoid simple point forecasts and focus on densities and events that are relevant to decision-makers.

Exploring Monetary Policy Transmission Mechanisms with Gvar Models

In an era of globalization, all economic entities are closely connected. Under such a trend we need to consider about more aspects than before. Because of the standard vector autoregression (VAR) model cannot meet our needs, this study applies a more comprehensive and systematic Global Vector Autoregressive (GVAR) model proposed by Pesaran, Schuermann and Weiner (hereafter PSW) in 2004 and uses quarterly data, from 1st quarter of 1981 to 1st quarter of 2013 to investigate monetary policy transmission mechanisms. Our results indicate credit channels in the transmission mechanisms of monetary policy do exist in Singapore, the UK, Japan, and the PRC; and GVAR models appear to be poorly suited for small countries acting as the origin of shock.

The Impact of Bank Capital on Economic Activity - Evidence from a Mixed-Cross-Section GVAR Model

We develop a Mixed-Cross-Section Global Vector Autoregressive (MCS-GVAR) model for the 28 EU economies and a sample of individual banking groups to study the propagation of bank capital shocks to the economy. We conduct various simulations with the model to assess how capital ratio shocks influence bank credit supply and aggregate demand. We distinguish between contractionary and expansionary deleveraging scenarios and confirm the intuitive result that only when banks choose to achieve higher capital ratios by shrinking their balance sheets would economic activity be at risk to contract. The model can be used to establish ranges of impact estimates for capital-related macroprudential policy measures, including counter-cyclical capital buffers, systemic risk buffers, G-SIB buffers, etc., also with a view to assessing the cross-country spillover effects of such policy measures. We highlight the importance for macroprudential policy makers to give clear guidance to banks as to how certain macroprudential policy measures should be implemented JEL Classification: C33, E51, E58

China's Slowdown and Global Financial Market Volatility: Is World Growth Losing Out?

China's GDP growth slowdown and a surge in global financial market volatility could both adversely affect an already weak global economic recovery. To quantify the global macroeconomic consequences of these shocks, we employ a GVAR model estimated for 26 countries/regions over the period 1981Q1 to 2013Q1. Our results indicate that (i) a one percent permanent negative GDP shock in China (equivalent to a one-off one percent growth shock) could have significant global macroeconomic repercussions, with world growth reducing by 0.23 percentage points in the short-run; and (ii) a surge in global financial market volatility could translate into a fall in world economic growth of around 0.29 percentage points, but it could also have negative short-run impacts on global equity markets, oil prices and long-term interest rates.

China's Slowdown and Global Financial Market Volatility: Is World Growth Losing Out?

China's GDP growth slowdown and a surge in global financial market volatility could both adversely affect an already weak global economic recovery. To quantify the global macroeconomic consequences of these shocks, we employ a GVAR model estimated for 26 countries/regions over the period 1981Q1 to 2013Q1. Our results indicate that (i) a one percent permanent negative GDP shock in China (equivalent to a one-off one percent growth shock) could have significant global macroeconomic repercussions, with world growth reducing by 0.23 percentage points in the short-run; and (ii) a surge in global financial market volatility could translate into a fall in world economic growth of around 0.29 percentage points, but it could also have negative short-run impacts on global equity markets, oil prices and long-term interest rates.