Structural VAR Model Research Articles

Monetary policy and regional economic performance in Mexico: A structural panel VAR approach

AbstractThe aim of this article is to investigate the dynamic effects of monetary policy shocks on economic activity and aggregate price levels across Mexican states. To do this, a recursive structural panel VAR model is implemented as proposed by Pedroni which allows for regional heterogeneity and structural identifying restrictions of common monetary policy shocks. Empirical evidence suggests a common monetary policy shock to short‐term interest rates induces significant cross‐state variation in prices and output level responses. Additional analysis indicates that structural features, such as the industry mix and the small versus large firm mix, are possible sources of the observed cross‐state variation influenced by interest rates and credit channels. We conclude that the observed differentiated regional impacts are sufficiently important to justify rethinking Mexico's current monetary policy framework in order to explicitly consider a regional view.

On the Nonlinear Impact of Oil Price Shocks on the World Food Prices Under Different Markets Conditions

This paper investigates the impact of oil price shocks on the world food prices. We use the structural VAR model to disentangle oil price shocks into supply, aggregate demand, and oil-specific demand-driven shocks. Moreover, we employ a new approach based on the Markov regime-switching quantile regression (MRS-QR) model to investigate the response of food prices to different oil price shocks. Based on monthly data from 1992 to 2018, results show that the reaction of food prices to different structural oil shocks depends on the oil price regimes and varies in significance, sign, and size throughout the food market conditions. Besides, the increases in regression coefficients and smoothed probability during food and oil crisis periods confirm the existence of contagion effects between oil and food markets. Moreover, we find that the supply and aggregate demand shocks do not show a strong contribution to the presence of this phenomenon. Conversely, oil-specific demand shocks represent the main factor that contributes to contagion between oil and food markets.

Container Trade and the U.S. Recovery

Since the 1970s, exports and imports of manufactured goods have been the engine of international trade and much of that trade relies on container shipping. This paper introduces a new monthly index of the volume of container trade to and from North America. Incorporating this index into a structural macroeconomic VAR model facilitates the identification of shocks to domestic U.S. demand as well as foreign demand for U.S. manufactured goods. We show that, unlike in the Great Recession, the primary determinant of the U.S. economic contraction in early 2020 was a sharp drop in domestic demand. Although detrended data for personal consumption expenditures and manufacturing output suggest that the U.S. economy has recovered to near 90% of pre-pandemic levels as of March 2021, our structural VAR model shows that the component of manufacturing output driven by domestic demand had only recovered to 59% of pre-pandemic levels and that of real personal consumption only to 76%. The difference is mainly accounted for by unexpected reductions in frictions in the container shipping market.

The impact of macroeconomic and oil shocks on India’s non-ferrous metal prices: A structural-VAR approach

This paper compares the value shocks from the real interest rates, real exchange rates, real crude prices, and other key macroeconomic variables on the metal prices. The structural VAR models are estimated on monthly data over the period 2005m12–2019m12 to determine the asymmetric effect of the macroeconomic shocks and determine whether commodity prices display overshooting behavior in response to these shocks. The impulse response and the forecast error variance decomposition function analyze the short-term impacts on the Indian non-ferrous metal prices. The results indicate that the metals index, and crude oil have a significant positive impact on the prices of metals, while the real interest rate negatively affects India’s metal prices. The impact of the real exchange rate and own shocks on real metal prices is found to be insignificant. Metal prices tend to display an overshooting behavior in response to changes in the real interest rate. Besides, the forecast error variance decomposition reveals the incremental contribution of crude oil prices in explaining the behaviour of metal prices.

A Structural Non-causal VAR Model of the Global Oil Market: the Role of Oil Supply News Shocks

Nonfundamentalness issue on the global oil market has been addressed by either augmenting small-scale VAR models by additional variables or latent factors, or using external instrument or proxies leading to more credible identification scheme. We tackle this problem by estimating a non-causal VAR model for standard global oil market variables. We identify the oil supply news shock as a shock that drives global oil production the most for a finite time horizon. First, Our findings highlight the prominent role of expectations in propagating the shock. Second, we show that a negative oil supply news shock results in abrupt and permanent reaction in global oil production, global economic activity and in oil inventory. However, the oil supply shock has only a limited effect on oil price. Finally, news shock about oil supply shortfalls do have macroeconomic consequences as it causes a substantial decline in US industrial production.

Svars: An R Package for Data-Driven Identification in Multivariate Time Series Analysis

Structural vector autoregressive (SVAR) models are frequently applied to trace the contemporaneous linkages among (macroeconomic) variables back to an interplay of orthogonal structural shocks. Under Gaussianity the structural parameters are unidentified without additional (often external and not data-based) information. In contrast, the often reasonable assumption of heteroskedastic and/or non-Gaussian model disturbances offers the possibility to identify unique structural shocks. We describe the R package svars which implements statistical identification techniques that can be both heteroskedasticity-based or independence-based. Moreover, it includes a rich variety of analysis tools that are well known in the SVAR literature. Next to a comprehensive review of the theoretical background, we provide a detailed description of the associated R functions. Furthermore, a macroeconomic application serves as a step-by-step guide on how to apply these functions to the identification and interpretation of structural VAR models.

House Price Shock and Business Cycle: The French Case

This study examined the relationship between house prices and the business cycle. Specifically, we examined the effect of house price and stock price in the French business cycle. After presenting the transmission channels from house price to the business cycle, we analyzed the cyclical properties of house prices and compared them with the Gross Domestic Product (GDP) cycle. The question arises: are fluctuations in economic activity more sensitive to a real estate price shock (property wealth effect) or a stock price shock (stock market wealth effect)? We collected the data over the 1980Q1-2015Q4 period and investigated the effects of house price and stock price shocks on French GDP by employing the Structural VAR model. We found the evidence that house price strongly affects the GDP cycle. Indeed, their response is significantly more important than the stock price, suggesting that the housing market might contribute to the persistent propagation of the shocks hitting the economic system. The study has important implications for both academia and policymakers and offers new insights into the French experience.JEL Codes - A10; B4

Delayed overshooting can still be a puzzle after the 1980s

This paper reinvestigates the effects of US monetary policy shocks on exchange rates by using the structural VAR model with sign restrictions imposed on impulse responses following Kim et al. (2017) who documented that a delayed overshooting puzzle was not observed in the post-Volcker era. The main results are as follows. First, a huge uncertainty in the result of the nominal exchange rate response, which is the main variable of interest in Dornbusch’s overshooting theory, can be observed although Kim et al. (2017) investigated mostly the real exchange rate response. Second, the delayed overshooting puzzle for both nominal and real exchange rates is found for the model that includes non-borrowed reserves divided by a lag of total reserves, instead of current total reserves used by Kim et al. (2017), to be consistent with monetary policy operating procedure.

Oil price change and Economy relationship :A global review using a nonlinear dynamic model for MENA Countries

This paper studies the macroeconomic effects of oil price shocks in a selection of MENA countries. The oil price shock is identified by assuming that an individual country's performance does not affect world oil prices. We put particular emphasis on the time-varying relationship between oil prices and macroeconomic variables and implement their approach in a Time-Varying Structural VAR model (TV-SVAR) framework.
 The main findings are that the macroeconomic effects of oil price shocks have evolved over time in MENA countries. Interestingly, however, we do not find a lot of heterogeneity among the MENA countries they consider, even though their list includes both net oil exporters (Algeria, Bahrain, Iran, Kuwait, Saudia Arabia) and net oil importers (Turkey and Tunisia)

Impacto do El Niño oscilação sul (ENOS) e da El Niña no mercado da soja brasileira

Os eventos climáticos extremos associados ao fenômeno atmosférico-oceânico conhecido como El Niño Oscilação Sul (ENOS) possuem impactos socioeconômicos significativos nas diferentes regiões brasileiras. No Nordeste brasileiro, observam-se em anos de El Niño, perdas agrícolas resultantes de fortes secas, levando-se a redução da renda das atividades rurais. Por outro lado, a região Sul é atingida por fortes enchentes que causam perdas humanas, de infraestrutura e comprometimento da produção agrícola. Em anos de La Niña, as secas que atingem a região Sul provocam quebras de safra, gerando forte pressão sobre o preço dos alimentos, enquanto no Nordeste há um maior volume de chuvas. A cadeia produtiva da soja destaca-se no agronegócio brasileiro, seja pelo valor da produção, quanto por ocupar o primeiro lugar na pauta de exportação agrícola. Haja vista, o Brasil grande produtor mundial qualquer mudança na quantidade ofertada ocasionaria diversos efeitos no mercado internacional de soja. Neste contexto, esse artigo tem como objetivo avaliar o impacto econômico dos eventos climáticos associados ao ENOS na produção, exportação e no preço real da soja em grãos brasileira. A base de dados utilizada consiste em dados mensais de setembro de 2006 a junho de 2019, totalizando 154 observações. Na construção do modelo, utilizou-se a técnica de Vetores Autoregressivos estruturais (VAR estrutural), com isso, foi possível estimar as funções impulso resposta e a decomposição da variância das variáveis consideradas. Os resultados mostraram que o El Niño (ou seja, choques positivos para o ENOS) é benéfico para produção e exportação e diminui o preço real da soja em grãos. Pelo contrário, o La Niña (ou seja, choques negativos para o ENOS) deprime a produção e exportação e aumenta o preço real. No entanto, o impacto geral das mudanças ocorridas pelo fenômeno ENOS é pequeno, tanto a curto e médio prazos, as alterações na demanda internacional são mais relevantes do que os choques do lado da oferta na explicação da dinâmica do mercado da soja brasileira. Por fim, as ações políticas ao fenômeno estudado devem ser elaboradas considerando as causas desses choques. Palavras-chave: Brasil. Var estrutural. El Niño. La Niña. Meio Ambiente.

Facts and Fiction in Oil Market Modeling

Baumeister and Hamilton (2019a) assert that every critique of their work on oil markets by Kilian and Zhou (2019a) is without merit. In addition, they make the case that key aspects of the economic and econometric analysis in the widely used oil market model of Kilian and Murphy (2014) and its precursors are incorrect. Their critiques are also directed at other researchers who have worked in this area and, more generally, extend to research using structural VAR models outside of energy economics. The purpose of this paper is to help the reader understand what the real issues are in this debate. The focus is not only on correcting important misunderstandings in the recent literature, but on the substantive and methodological insights generated by this exchange, which are of broader interest to applied researchers.

Do flexible working hours amplify or stabilize unemployment fluctuations?

In this paper we challenge the conventional view that increasing working time flexibility limits the amplitude of unemployment fluctuations. We start by showing that hours per worker in European countries are much less procyclical than in the US, and even co-move negatively with output in selected economies. This is confirmed by the results from a structural VAR model for the euro area, in which hours per worker increase after a contractionary monetary shock, exacerbating the upward pressure on unemployment. To understand these counterintuitive results, we develop a structural search and matching macroeconomic model with endogenous job separations that resemble layoffs. We show that this feature is key to generating a countercyclical response of hours per worker. When we augment the model with frictions in working hours adjustment and estimate it using euro area time series, we find that increasing flexibility of working time amplifies cyclical movements in unemployment.

Do credit conditions matter for the impact of oil price shocks on stock returns? Evidence from a structural threshold VAR model

This paper aims to examine whether the effect of oil price shocks on the stock market varies across different credit conditions. Based on the U.S. monthly stock data at the aggregate level and industry levels from January 1990 to January 2018, we use a structural threshold vector autoregressive (TVAR) model to investigate reactions of stock returns to oil price shocks under different credit conditions. Our empirical results show that there exists asymmetrical response of U.S. stock returns to crude oil price shocks substantially depends on credit conditions. In particular, oil prices have a negative effect on equity market returns when the U.S. economy is in a normal credit condition, while the relationship is reversed in a tight credit condition. We find (i) that there is no significant difference in the impact of oil prices on stock returns among various industries, and (ii) that the effect of oil price shocks on stock returns is only significant in the short-term rather than in the long-term.

Efectos industriales de la política monetaria en México: un enfoque de vectores autoregresivos estructurales en panel

El objetivo de esta investigación es analizar el efecto que un cambio permanente en la política monetaria tendría en las actividades manufactureras en México. Se argumenta que debido a la importancia económica de este tipo de actividades en el crecimiento económico y la creación de empleo en el país, es necesario conocer el impacto de la política en este sector. A partir de un modelo vectorial estructural en panel propuesto por Pedroni (2013), los resultados indican que los choques no anticipados en la política monetaria tendrían un efecto diferencial sustantivo entre las diferentes actividades manufactureras, situación que tiene implicaciones acerca del canal a través del cual el banco central puede incidir en la estabilización de precios e inclusive en la economía real.

Exogenous and endogenous sterilisation under managed exchange rates

AbstractOne of the most widely debated aspects of international macroeconomics surrounds the efficacy of Central Bank sterilisation. However, ‘exogenous’ sterilisation initiatives by the Central Bank are involuntary if policymakers are to achieve a policy rate objective. Also, in many instances any excess liquidity is able to be sterilised ‘endogenously’ by commercial banks. To demonstrate both forms of sterilisation, this paper employs several structural VAR models. We show that (a) both exogenous and endogenous sterilisation initiatives are more or less involuntary, (b) the impossible trinity can be challenged and (c) why imbalances across the international monetary system can occur and persist.

EVALUATION OF MONETARY POLICY SHOCKS IN TURKEY: A STRUCTURAL VAR APPROACH

This paper empirically investigates the effects of monetary policy shocks on the Turkish economy using a structural VAR model. Monetary policy shocks are identified based on the non-recursive structural identification scheme. Since monetary policy stance is contingent on different funding rates in the wide interest rate corridor for the selected sample period, 2011:M1-2018:M12, this paper employs “weighted average funding cost”to represent the monetary policy stance of the CBRT. The baseline identification scheme is also extended in different ways to check the robustness of the results. The empirical results can be summarized as follows. First, Turkish data are not free from price and exchange rate puzzles. More importantly, qualitative inferences are quite persistent across different identification restrictions. Second, structural impulse-responses reveal that there is a two-way simultaneous interaction between monetary policy and exchange rate. Finally, the presence of money stock in the VAR model is redundant for identifying monetary policy shocks since the VAR models with and without money stock generate almost identical results.

Understanding the Estimation of Oil Demand and Oil Supply Elasticities

This paper examines the advantages and drawbacks of alternative methods of estimating oil supply and oil demand elasticities and of incorporating this information into structural VAR models. I not only summarize the state of the literature, but also draw attention to a number of econometric problems that have been overlooked in this literature. Once these problems are recognized, seemingly conflicting conclusions in the recent literature can be resolved. My analysis reaffirms the conclusion that the one-month oil supply elasticity is close to zero, which implies that oil demand shocks are the dominant driver of the real price of oil. The focus of this paper is not only on correcting some misunderstandings in the recent literature, but on the substantive and methodological insights generated by this exchange, which are of broader interest to applied researchers.

The effect of real exchange rate uncertainty on Turkey’s foreign trade: new evidences from SVAR model

ABSTRACT In this study, the relationship between exchange rate uncertainty and Turkey’s foreign trade performance is analyzed using monthly data from 2002:01 to 2017:12 via Structural VAR (SVAR) model. The empirical results indicate that domestic income and import have more impact on Turkey’s export. Moreover, domestic income, exchange rate and exchange rate uncertainty are effective on Turkey’s import. These results imply that Turkey’s export is dependent on imported inputs more than the exchange rate and exchange rate uncertainties.

The impacts of oil price shocks and United States economic uncertainty on global stock markets

AbstractThis article examines interdependence between oil price shocks and United States economic uncertainty and their effects on global stock markets within a structural VAR model over the last 40 years. I find that aggregate demand shocks cause a transitory rise in global real stock returns, whereas precautionary oil demand and United States economic uncertainty shocks decline the returns. Especially, oil demand shocks significantly increase United States economic uncertainty, indicating that their direct impacts on global stock markets are amplified by its endogenous response. Variance decomposition analysis shows that oil price shocks and United States economic uncertainty explain 17% and 6% of long‐run variations in global real stock returns, respectively. These figures have more than tripled when the model is estimated on post 2000 data, suggesting that oil market fundamentals and United States macro uncertainty are an important determinant of global stock market movements.

Feeling the Heat: Climate Risks and the Cost of Sovereign Borrowing

We empirically examine the link between the cost of sovereign borrowing and climate risk for 40 advanced and emerging economies. Controlling for a large set of domestic and global factors, we show that both vulnerability and resilience to climate risk are important factors driving the cost of sovereign borrowing at the global level. Overall, we find that vulnerability to the direct effects of climate change matter substantially more than climate risk resilience in terms of the implications for sovereign borrowing costs. Moreover, the magnitude of the effect on bond yields is progressively higher for countries deemed highly vulnerable to climate change. Impulse response analysis from a set of panel structural VAR models indicates that the reaction of bond yields to shocks imposed on climate vulnerability and resilience become permanent after around 12 quarters, with high risk economies experiencing larger permanent effects on yields than other country groups.