SVAR Analysis Research Articles

An Octa-Variate SVAR Analysis of Inflation Targeting Under the Mundell-Fleming-Dornbusch Framework. The Case of South Africa

Using an octa-variate Structural Vector Autoregressive model, our empirical outcomes do not invalidate all the predictions of the Mundell-Fleming-Dornbusch model. Accordingly, the consumer price is not perfectly sticky; transmitted movements from other macro variables to the interest rate do not last more than 4 quarters; monetary policy is apparently more effective than the fiscal policy; movements transmitted from monetary shocks to the exchange rate last less than three months; and the exchange rate seems to be more effective in driving the consumer price. Therefore, we suggest that a policy package composed of the exchange rate and the interest rate would be more efficient in terms of keeping the inflation in the South African target band of 3% to 6%.

Exploring the effects of financial and fiscal vulnerabilities on G7 economies: Evidence from SVAR analysis

We examine the possible interactions of the financial cycle and fiscal position for G7 economies. We employ the innovative aggregate financial and fiscal stress indexes which are able to depict the perplexed nature of modern economies. A SVAR model is developed to investigate the effects of both financial and fiscal stress on key macroeconomic variables. The results, using two different identification methods, reveal that financial and fiscal shocks affect negatively the key macroeconomic variables. Additionally, there is a weak feedback effect from a financial shock to fiscal sector and vice versa.

Household Finance and the Welfare State: A Case Study of the United States, 1980-2010

The sharp rise in household finance, both in debt and in assets, is one of the striking empirical facts about the US economy of the last two decades. But it is still not clear what caused it. Economists, both mainstream and heterodox, seek an explanation in financial market innovation and liberalization. But it is hard to find systematic evidence for this link. Our paper takes up another line of inquiry. Political economists have started to ask how the restructuring of the welfare state may have affected household finance. We use SVAR analysis to establish whether there is a link between the retrenchment of public social spending and the expansion of tax-incentivised private social spending, on the one hand, and household finance variables on the other. More specifically, we ask whether the transformation of the US welfare state over the last 30 years has affected household finances through the channel of debt, leverage, or asset formation. Our findings suggest that the asset channel is empirically the most likely candidate and we point to some welfare state reforms that can support the operation of this channel since the mid-1990s.

Shocks' Symmetry in the EMU: A SVAR Analysis with Sign Restrictions

This paper performs an empirical analysis on the nature and the impact of economic shocks in the euro countries, to investigate the sustainability of the EMU after more than a decade from its start. A structural VAR model identified with sign restrictions estimates three kinds of economic shocks - supply, demand, and monetary policy ones - for a large set of European countries and different sample periods, preceding and including the EMU. Findings provide evidence that shocks have increased their co-movement (symmetry) and decreased their impact on member countries after the EMU onset, relative to two EU control countries not adopting the single currency, namely the UK and Sweden. Shocks result less correlated for a cluster of countries (latecomers). The analysis also shows that during the latest financial and sovereign debt crisis symmetry of shocks further increased, but their impact increased as well, except for monetary policy shocks, which dampened interest rates’ volatility. Finally, including the real exchange rate among the endogenous variables of the SVAR model confirms the empirical findings.

Revisiting the Relationship between Unemployment Rates and Shadow Economy. A Toda-Yamamoto Approach for the Case of Romania

Shadow economy(SE) is a controversial topic that has aroused the interest of the specialists from the 60's, when the phenomenon took a great extent. Formed in the literature under various names, the shadow economy exists in a more or less extent in all countries, regardless of their level of development, enjoying an enduring existence, although as area of research is a new “young” area.The paper aims to investigate the relationship between the size of the shadow economy (SE) and the registered and ILO unemployment rates for the case of Romanian data using Toda-Yamamoto approach for quarterly data covering the period 2000-2010.The size of the Romanian shadow economy based on the currency demand approach was estimated using multivariate cointegration and vector error correction models (VECM) in order to investigate whether a long-run equilibrium relationship exists between currency demand and its determinants.In order to investigate the relationship between the unemployment rates and the size of the shadow economy for the case of Romania we use an innovative econometric methodology to study the direction of causality between the two variables, namely Toda and Yamamoto (1995).According to Giles and Tedds(2002), two opposing forces determine the relationship between unemployment and the informal economy. On the one hand, an increase in the unemployment rate may involve a decrease in the informal economy because it is positively related to the growth rate of GDP and eventually negatively correlated with unemployment (Okun's law). On the other hand, increase in unemployment leads to an increase in people working in the informal economy because they have more time for such activities.Dell’Anno and Solomon (2007) stated that there is a positive relationship in the short-run between unemployment rate and U.S. shadow economy for the period 1970-2004. Using SVAR analysis, they investigate the response of the shadow economy to an aggregate supply shock (impact of the shadow economy to a temporary shock in unemployment). The empirical results show that in the short-run, a positive aggregate supply shock causes the shadow economy to rise by about 8% above the baseline.According to the Toda-Yamamoto causality test results, there is strong evidence of causality running from the registered and ILO unemployment rates to the shadow economy when a sufficiently high lag order is selected.

Macro Fiscal Policy in Economic Unions: States as Agents

The American Recovery and Reinvestment Act (ARRA) was the US government’s fiscal response to the Great Recession. An important component of ARRA’s $796 billion proposed budget was $318 billion in fiscal assistance to state and local governments. We examine the historical experience of federal government transfers to state and local governments and their impact on aggregate GDP growth, recognizing that lower-tier governments are their own fiscal agents. The SVAR analysis explicitly incorporates federal intergovernmental transfers, disaggregated into project (e.g., infrastructure) aid and welfare aid, as separate fiscal policies in addition to federal government purchases and federal net taxes on household and firms. A narrative analysis provides an alternative identification strategy. To better understand the estimated aggregate effects of aid on the economy, we also estimate a behavioral model of state responses to such assistance. The analysis reaches three conclusions. First, aggregate federal transfers to state and local governments are less stimulative than are transfers to households and firms. It is important to evaluate the two policies separately. Second, within intergovernmental transfers, matching (price) transfers for welfare spending are more effective for stimulating GDP growth than are unconstrained (income) transfers for project spending. Matching aid is fully spent on welfare services or middle-class tax relief; half of project aid is saved and only slowly spent in future years. Third, simulations using the SVAR specification suggest ARRA assistance would have been 30 percent more effective in stimulating GDP growth had the share spent on government purchases and project aid been fully allocated to private sector tax relief and to matching aid to states for lower-income support.

Impact of Singapore, US and Japanese Macroeconomic Shocks on Malaysian Economy: A Sign-Restricted SVAR Analysis

ABSTRACT This paper examines the relative importance of Singapore, US and Japanese macroeconomic shocks on Malaysian economy. Employing structural vector auto regression (SVAR) model with a sign restriction approach, the study estimates four models. Each model consists of four domestic macroeconomic variables (output, inflation, interest rate and exchange rate) and three foreign variables (output, inflation and interest rate) of US, Japan, Singapore and the all countries trade-weighted variables, respectively. The results of the study reveal that, relative to domestic shocks, foreign shocks appear to play more prominent role in influencing domestic macroeconomic variables. Among the three foreign countries being investigated, the effect of shock of Singapore is the most dominant. The US effect comes second and the Japanese effect comes last. When Singapore’s variables are the only foreign factors in the system, their shocks bring about significant variation to Malaysian variables especially the output. Consequently, in modeling the effect of foreign factors on Malaysian economy, Singapore effect should be taken into account. This is important as Singapore is not only one of Malaysia’s long-term major trading partners, but it is also one of the Malaysia’s closest neighbors by geographical distance. Keywords: Foreign shocks; domestic shocks; monetary policy; SVAR; sign restrictions ABSTRAK Kertas ini mengkaji kepentingan relatif kejutan makroekonomi di Singapura, AS dan Jepun terhadap ekonomi Malaysia. Dengan menggunakan model vektor autoregresif berstruktur (SVAR) bersama kaedah kekangan tanda, kajian secara keseluruhan menganggarkan empat model. Setiap satu model mengandungi pemboleh ubah makroekonomi domestik (keluaran, inflasi, kadar bunga dan kadar pertukaran) dan pemboleh ubah makroekonomi asing (keluaran, inflasi dan kadar bunga) yang setiap satunya daripada negara Singapura, AS, Jepun dan kesemua empat negara yang diwakili oleh pemboleh ubah asing yang diterbitkan berdasarkan wajaran perdagangan. Keputusan kajian menunjukkan bahawa kejutan di negara luar memberi kesan yang lebih besar kepada pemboleh ubah makroekonomi domestik. Daripada tiga negara yang diselidiki, didapati kesan kejutan negara Singapura adalah paling dominan. Kesan kejutan negara Amerika syarikat adalah kedua penting dan kesan kejutan Jepun adalah yang paling kurang penting. Apabila pemboleh ubah negara Singapura sahaja dimasukkan dalam model, kejutannya memberi kesan perubahan yang signifikan kepada pemboleh ubah Malaysia terutamanya ke atas output negara. Justeru, dalam pemodelan kesan faktor asing ke atas ekonomi Malaysia, kesan Singapura harus diberi penekanan. Hal ini penting kerana Singapura bukan sahaja rakan dagang jangka panjang Malaysia yang penting, malah ia juga adalah antara yang terdekat dari aspek geografi. Kata kunci: Kejutan asing; kejutan domestik; dasar monetari; SVAR; kekangan tanda

Macro Fiscal Policy in Economic Unions: States as Agents

The American Recovery and Reinvestment Act (ARRA) was the US government’s fiscal response to the Great Recession. An important component of ARRA’s $796 billion proposed budget was $318 billion in fiscal assistance to state and local governments. We examine the historical experience of federal government transfers to state and local governments and their impact on aggregate GDP growth, recognizing that lower-tier governments are their own fiscal agents. The SVAR analysis explicitly incorporates federal intergovernmental transfers, disaggregated into project (e.g., infrastructure) aid and welfare aid, as separate fiscal policies in addition to federal government purchases and federal net taxes on household and firms. A narrative analysis provides an alternative identification strategy. To better understand the estimated aggregate effects of aid on the economy, we also estimate a behavioral model of state responses to such assistance. The analysis reaches three conclusions. First, aggregate federal transfers to state and local governments are less stimulative than are transfers to households and firms. It is important to evaluate the two policies separately. Second, within intergovernmental transfers, matching (price) transfers for welfare spending are more effective for stimulating GDP growth than are unconstrained (income) transfers for project spending. Matching aid is fully spent on welfare services or middle-class tax relief; half of project aid is saved and only slowly spent in future years. Third, simulations using the SVAR specification suggest ARRA assistance would have been 30 percent more effective in stimulating GDP growth had the share spent on government purchases and project aid been fully allocated to private sector tax relief and to matching aid to states for lower-income support.

Trade linkages and growth in Latin America: An SVAR analysis

How do shocks originated in large economies around the globe have transmitted to the growth rates of Latin American countries? To answer this question, we propose a highly parsimonious structural VAR model, identified through bilateral trade linkages. Since trade weights evolve through time, the effects of shocks are time-varying and we are able to quantify how growth in the region has been affected by tighter trading linkages with fast-growing emerging economies, and how it has responded to a new world trade structure, featuring China as a major player. It is found that about half of the vigourous growth registered in Latin American countries by the end of the 2000s can be attributed to direct and especially indirect multiplier effects induced by the spectacular growth of the Chinese economy.

Structural Panel VARs

The paper proposes a structural approach to VAR analysis in panels, which takes into account responses to both idiosyncratic and common structural shocks, while permitting full cross member heterogeneity of the response dynamics. In the context of this structural approach, estimation of the loading matrices for the decomposition into idiosyncratic versus common shocks is straightforward and transparent. The method appears to do remarkably well at uncovering the properties of the sample distribution of the underlying structural dynamics, even when the panels are relatively short, as illustrated in Monte Carlo simulations. Finally, these simulations also illustrate that the SVAR panel method can be used to improve inference, not only for properties of the sample distribution, but also for dynamics of individual members of the panel that lack adequate data for a conventional time series SVAR analysis. This is accomplished by using fitted cross sectional regressions of the sample of estimated panel responses to correlated static measures, and using these to interpolate the member-specific dynamics.

Private sector balance, financial markets, and US cycle: a SVAR analysis

PurposeConsidering the sectoral balance approach of Godley, and focusing only on the two main components of the private sector balance for the US economy (household and non‐financial corporate balance), the purpose of this paper is to investigate the relationship between these two sectors, the financial variables, and economic cycle. In particular, the paper considers all these relationships endogenously.Design/methodology/approachThe authors estimate a structural VAR model between household and (non‐financial) corporate financial balances, financial markets, and economic cycle and the authors perform an impulse response analysis. All the variables are expressed as cyclical components applying the Hodrick‐Prescott filter.FindingsThe main result is that: household and corporate balances react to financial markets in the way the authors expected and discussed; the economic cycle influences the two financial balances; the corporate balance has a positive impact on the cycle; the economic cycle and financial balances influence the financial variables. In particular, the point that shows that the corporate balance has a positive impact on the cycle shows that the corporate balance is a leading component of the cycle as suggested by Casadio and Paradiso and accords with Minsky's theory of financial instability.Research limitations/implicationsThe analysis does not include the foreign sector (current‐account balance).Originality/valueThis study is an important step forward with respect to the two main contributions in literature which use this approach: the Levy Institute macroeconomic team and Goldman Sachs. Methodologically their models are based on assumptions (such as exogeneity or market clearing price mechanism for the financial markets) that the authors overcome considering all the relationships studied in an endogenous manner.

The Dynamic Fluctuation Relationship between China’s Urbanization and the Disparity of Urban-Rural Resident Living Direct Carbon Dioxide Emissions: A SVAR Analysis

Currently, continuous China’s urbanization will emit considerable carbon dioxide emissions, so that China is facing mounting pressure from not only the international community but also domestic itself. This paper applies SVAR model to evaluate the dynamic fluctuation relationship between China’s urbanization and the disparity of urban-rural resident living direct carbon dioxide emissions. The result indicates that the urbanization has an obvious positive effect on the difference of resident living direct carbon dioxide emissions from urban and rural in the short term and it has negative impact in the long term. Moreover, the impact of urban-rural resident living direct carbon dioxide emissions disparity on the urbanization has a negative effect in the short term, gradually turns into a positive, and finally stabilizes zero level. Based on the above conclusions, the government should provide corresponding policy implications for China's carbon emission reduction.

The price puzzle and the role of South African monetary policy in Botswana and Namibia

Using SVAR analysis, this paper finds what Sims calls a ‘price puzzle’, i.e. a case where CPI increases after a positive interest rate shock. The SVAR analysis controls for various monetary transmission mechanisms, including one based on the South African dominance hypothesis that links South African monetary policy to inflation in Botswana and Namibia. The paper follows Castelnuovo and Surico and interprets the price puzzle as a symptom of an indeterminate monetary policy. Subsequently the paper explores the finding of indeterminate monetary policy further by using an unstructured VAR to estimate the monetary reaction functions of Botswana and Namibia. These results also point to the presence of an indeterminate monetary policy. Lastly, both the SVAR and the unstructured VAR estimated for the monetary reaction function indicate the importance of the exchange rate, and not the interest rate, as a determinant of inflation in both Botswana and Namibia

Discretionary Policy Interactions and the Fiscal Theory of the Price Level: A SVAR Analysis on French Data

The theory of the price (FTPL; Woodford, 1995 and 2001) marks the revival of interest for fiscal policy, after the long blackout that followed the crisis of Keynesian economics. Among the causes of this revival, an important role was played by the dramatic drop in US public debt during the Clinton presidency. The reduced stock of bonds in the hands of households led researchers to re-investigate the relationship between consumption, the government intertemporal budget constraint, wealth effects and monetary policy. As we will argue below, the attempts to give empirical support to the FTPL - that had its theoretical precursors in the work of Leeper (1991) and Sims (1994) among others -, have been rather unsuccessful so far, so that its main merit lies in the fact that it brought back into the debate the interaction between fiscal and monetary policy and its effects on the level of activity and on prices (...).

Infinite-Variance, Alpha-Stable Shocks in Monetary SVAR: Final Working Paper Version

This paper adumbrates a theory of what might be going wrong in the monetary SVAR literature and provides supporting empirical evidence. The theory is that macroeconomists may be attempting to identify structural forms that do not exist, given the true distribution of the innovations in the reduced-form VAR. The paper shows that this problem occurs whenever (1) some innovation in the VAR has an infinite-variance distribution and (2) the matrix of coefficients on the contemporaneous terms in the VAR’s structural form is nonsingular. Since (2) is almost always required for SVAR analysis, it is germane to test hypothesis (1). Hence, in this paper, we fit a
-stable distributions to VAR residuals and, using a parametric-bootstrap method, test the hypotheses that each of the error terms has finite variance.

The macroeconomic effects of fiscal policy in Portugal: a Bayesian SVAR analysis

With a new quarterly dataset we estimate a Bayesian Structural Autoregression model and a Fully Simultaneous System approach to analyze the macroeconomic effects of fiscal policy. Results show that positive government spending shocks, in general, have a negative effect on real GDP; lead to “crowding-out” effects of private consumption and investment; have a persistent and positive effect on the price level and a mixed impact on the average financing cost of government debt. Explicitly considering the government debt dynamics in the model is also important. A VAR counter-factual exercise confirms that unexpected positive spending shocks create relevant “crowding-out” effects.

The Macroeconomic Effects of Exogenous Fiscal Policy Shocks in Germany: A Disaggregated SVAR Analysis

Summary We investigate the effects of fiscal policy shocks on the German economy extending the SVAR approach of Blanchard and Perotti (2002). Direct government expenditure shocks are found to increase output and private consumption on impact. The output multiplier is smaller than one and is falling rather quickly reaching zero after 3 years. Government operating expenditure has size able positive effects on output, in the long run in particular due to public capital formation. Compensation of public employees is not effective in stimulating the economy.Government net revenue shocks do not affect output significantly. Indirect taxes have little effects, while direct taxes lower output significantly. Overall, the effects of fiscal policy are short-lived with the exception of public investment increases.

The role of monetary shocks and real shocks on the current account, the terms of trade and the real exchange rate dynamics: a SVAR analysis

The article is an empirical investigation of the role of monetary shocks and real shocks on the current account, the terms of trade and the real exchange rate dynamics. Three new open economy macro-economics (NOEM) models are studied to motivate the empirical investigation. Then I apply the Blanchard–Quah decomposition to identify a SVAR model. The empirical evidence supports the NOEM model with the simplified household preference specification and with the small degree of pricing-to-market. The evidence also illustrates monetary shocks important for the real exchange rate and the terms of trade movements, but not for the current account fluctuations.

Economic Growth, Redistribution Policy and Fiscal Policy in South Africa: An SVAR Analysis

The aim of this article is to uncover which method of fi nancing an increase in social services expenditure would guarantee economic growth while assuring that government operates within a balanced budget constraint. The article will also assess whether fi scal policy (which aims at fiscal discipline) could improve the rate of economic growth when a particular tax is used to fi nance social services expenditure. The SVAR models applied in this study used two types of restrictions: the contemporaneous and the long-run (Blanchard and Quah) restriction. In the Blanchard and Quah restriction, structural shocks are identifi ed under two different categories: the Keynesian and neoclassical types. Africa Insight Vol. 38 (1) 2008: pp. 67-80

The Macroeconomic Effects of Fiscal Policy in Portugal: A Bayesian SVAR Analysis

In the last twenty years Portugal struggled to keep public finances under control, notably in containing primary spending. We use a new quarterly dataset covering 1979:1-2007:4, and estimate a Bayesian Structural Autoregression model to analyze the macroeconomic effects of fiscal policy. The results show that positive government spending shocks, in general, have a negative effect on real GDP; lead to important crowding-out effects, by impacting negatively on private consumption and investment; and have a persistent and positive effect on the price level and the average cost of financing government debt. Positive government revenue shocks tend to have a negative impact on GDP; and lead to a fall in the price level. The evidence also shows the importance of explicitly considering the government debt dynamics in the model. Finally, a VAR counter-factual exercise confirms that unexpected positive government spending shocks lead to important crowding-out effects.