SVAR Model Research Articles

Did Monetary Policy Kill the Phillips Curve? Some Simple Arithmetics

Abstract An apparent disconnect has taken place between inflation and economic activity in the pre-COVID US economy, causing some to believe that the Phillips curve has flattened. We argue that this view may be premature. Using New Keynesian theory and estimated SVAR models, we decompose fluctuations in US macro data into the components driven by demand and supply disturbances, and confront the inflation disconnect with some simple arithmetics. This exercise confirms a relatively stable Phillips curve slope while the demand curve has flattened substantially. Our results are consistent with a shift towards firmer monetary policy commitment to inflation stability.

Revisiting the Pasinetti Index: Understanding Its Cyclical and Long-Term Features and Its Important Implications for Macroeconomic Policy

ABSTRACT This article explores the long-term and cyclical effects of the Pasinetti Index (PI) and their implications for income distribution and macroeconomic policy in a post-pandemic environment marked by inflationary pressures and increasingly restrictive central bank policies. It discusses the relevance of adopting a zero PI as monetary policy framework as either a short-term target or a long-term norm. The research underscores the importance of coordinating monetary and fiscal policies to achieve a balanced mix of short-term and long-term macroeconomic goals, as per the Pasinetti rule, aimed at stabilizing income distribution between rentier and non-rentier groups without compromising on a Keynesian full employment commitment. By analyzing historical data and employing a SVAR model for Canada and the United States, the study highlights the significant cyclical impact of PI fluctuations on unemployment and income distribution. The findings challenge the efficacy of rigid monetary policy rules and support a macroeconomic policy that reconciles short-term employment objectives and long-term distributional goals.

Disentangling demand and supply inflation shocks from electronic payments data

We propose a novel way to track inflation dynamics by identifying supply and demand shocks at a highly disaggregated level using electronic payments data. We estimate SVAR models and group historical decompositions at the product level into categories of the CPI. Our approach differs from others by explicitly estimating the shocks and retrieving their time-series dynamics. This information is valuable for monetary policy design, as it allows us to assess: (i) the type of shock driving any inflation category, (ii) whether shocks are generalized or driven by large shocks to specific items, and (iii) how the shocks evolve over time. An application to Chile suggests three distinct phases of inflation dynamics since COVID-19. In 2020, negative supply and demand shocks nearly offset each other. In 2021, demand shocks were boosted by massive liquidity injections. In 2022, global supply shocks introduced additional pressures on top of already elevated inflation.

Effect of Macroeconomic Variables on Economic Growth in Nigeria

The study examined the effect of macro-economic variables on economic growth in Nigeria between 1990-2022. Specifically, the paper examined the effect of Exchange rate on Economic growth in Nigeria and determined the effect of interest rate on Economic growth in Nigeria. The paper employed ex-facto research design, using secondary data and adopted SVAR model. The paper found out that interest rate has a significant effect on Economic growth (RGDP) in Nigeria, and found that exchange rate has a significant effect on Economic growth (RGDP) in Nigeria. The study concluded that macroeconomic variables has a significant effect on Economic growth in Nigeria. Based on the study’s findings and conclusions above, the following recommendations were made: the government should improve on her foreign reserves as an absolute measure that will stabilize exchange rate to boost economic environment for effective investment to thrive and contribute to gross domestic product in Nigeria, and interest rate is found to have increased the potentials of Economic growth in Nigeria. It is therefore important to note that since interest rate have significantly affected the Economic growth in Nigeria, the CBN should improve on discount rate to stabilize interest rate to boost economic environment for effective investment to thrive and contribute to gross domestic product in Nigeria.

Empirical analysis of the J-Curve and Marshall-Lerner condition: impacts of macroeconomic shocks on the Brazilian trade balance using a Bayesian SVAR Identified via heteroskedasticity

ABSTRACT This study examines the impacts of macroeconomic shocks on the Brazilian trade balance, disaggregated into five sectors, using a Bayesian SVAR model identified via heteroskedasticity. We find significant evidence supporting the Marshall-Lerner condition across all sectors analysed. Although we have not observed significant evidence supporting the J-curve, there is a higher probability of the phenomenon occurring than not occurring. Additionally, our findings indicate that a world GDP shock influences the domestic trade balance with the expected sign. A ‘pessimism’ shock regarding domestic economic activity leads to an improvement in the trade balance. Moreover, it is observed that an increase in GDP, even when caused by a supply shock, leads to a deterioration of the trade balance in the medium term.

THE IMPACT OF THE RECIPROCAL RELATIONSHIP BETWEEN EXCHANGE RATES AND INTEREST RATES ON THE BOND MARKET USING THE SVAR MODEL FOR CHINA FOR THE PERIOD FROM (2000-2020)

This study aims to illustrate the effect of the reciprocal relationship between the exchange rates and interest rates on the bond market by using the SVAR model for China during (2000 -2020), this is to analyze and measure the relationship between exchange rates and interest rates and showing their impact through changes in the bond index and monitoring the changes that occur in their traded prices in the financial markets. This study is based on three standard model estimations. The first model includes the effect of interest rates and inflation on the exchange rates. The second model shows the effect of the exchange rates and money supply on the interest rate. The third model includes the effect of exchange and interest rates on the bond index. The Structural Vector Auto Regression Model (SVAR) was used to test the long-term relationship between the variables of the study, in addition to the variance Decomposition analysis and the analysis of the Impulse response functions (IRF). The results showed that the reciprocal relationship between the exchange rates and interest rates is a positive inverse relationship, and the effect is in both directions. In other words, when the prevailing interest rate rises in the country, it leads to an appreciation in the value of the currency due to the increase in demand for the currency of that country, resulting in a depreciation in its exchange rate and conversely. In addition, the results indicated that the bond index is sensitive to any shock or any unexpected change in exchange rate and interest rate and that these shocks manifest in the short term and stabilize in the long term.

The Shock Effect of International Oil Price Fluctuation on RMB Exchange Rate-Based on the stochastic version of MFD and SVAR models

The Shock Effect of International Oil Price Fluctuation on RMB Exchange Rate-Based on the stochastic version of MFD and SVAR models

Commodity Price and Indonesian Fiscal Policy: An SVAR Analysis with Non-Gaussian Errors

Abstract This study exploits the non-Gaussianity for identification of a Bayesian SVAR model on newly unexplored monthly Indonesian data from 2007M1–2022M12, where we disentangle the commodity-related revenue from the total government revenues. Our main contribution is in labeling the statistically identified structural shocks as economic shocks by conducting a formal assessment of a set of proposed sign constraints. We simultaneously label a commodity price and three fiscal policy shocks, i.e. fiscal income tax, investment-spending, and consumption-spending shocks. Having evaluated their impacts, among the fiscal policy shocks, we find income tax shock the most impactful on output. Moreover, during the Covid crisis 2020–2021, the launched fiscal economic stimulus package (PEN program) positively contributed to the output. The recession of the Covid crisis could have deepened had the fiscal policymaker not responded at all. Albeit so, we should not overlook the contribution of the rising commodity prices to the output recovery. We also evaluate the commodity boom period in 2007–2009, the tax amnesty program in 2016–2017 and 2022, and the infrastructure spending boost in 2015. Our results suggest that output and retail sales would have been lower without the commodity price shock’s contribution during the commodity boom. Then, we find that tax amnesty and infrastructure spending boost policies contribute to higher retail sales.

Are exchange rates absorbers of global oil shocks? A generalized structural analysis

This paper studies the impact of global oil market shocks on the level, volatility, and correlation dynamics of real effective exchange rates over time. We find that the USD and the EURO act as shock absorbers, as shocks to the global oil market explain substantial proportions of the volatility and correlation dynamics of each exchange rate – compared to the small or even negligible contributions of exogenous interest rate and effective exchange rate shocks. Further we find an interesting “puzzle” that the Euro Area unexpectedly behaves as if it were an oil exporting country - the EURO appreciates in response to a flow demand shock that increases oil price. Our findings are garnered from a generalized time-varying SVAR model with stochastic volatility that allows for correlated disturbances between observation and transition equations and among transition equations themselves. This approach of enriching dynamics between the first and second moments of endogenous variables is particularly suitable for capturing the transmission of structural level oil shocks to the volatility of exchange rates and their correlation with the global oil market.

The Response of Macroeconomic Variables to Government Spending Shocks in the Sudanese Economy 1989-2019: Comparing the Structural Shocks (DSGE Approach) and Impulse Response (SVAR Model)

The Response of Macroeconomic Variables to Government Spending Shocks in the Sudanese Economy 1989-2019: Comparing the Structural Shocks (DSGE Approach) and Impulse Response (SVAR Model)

Обзор подходов к оценке влияния новых вызовов на экономику и отдельные аспекты налогообложения

The article presents a review of publications devoted to the approaches to assessing the impact of external shocks on the economy in general and on certain aspects of taxation in particular. It considers both studies that assess this impact by analyzing macroeconomic indicators (less often — budget indicators) and building econometric models (mainly SVAR and VAR models are used in this case), and studies in which various authors propose their own indicators to assess this impact (most often they are either sustainability indicators or stress indicators). Special attention is paid to publications the subject of which is the impact of new challenges on the tax system. A separate block includes publications in which the above issues are considered in relation to the Russian tax system. These are not only scientific articles on the topic, but also documents of international organizations, such as the International Monetary Fund, OECD, World Bank, etc. In addition, the article provides an overview of publications of foreign scientific institutes and research centers. Sanctions imposed on the economy of the Russian Federation are a particular case of an external shock. Thus, a review of publications assessing the impact of new challenges (by the example of sanctions) on the tax system of the Russian Federation is presented. The authors conclude that to assess the impact of new challenges on the tax system it is more advisable to use indicators based on statistical tax reporting.

What can SVAR models tell us about the impact of Monetary Policy shocks on Aggregate Demand components and Inflation in Egypt?

What can SVAR models tell us about the impact of Monetary Policy shocks on Aggregate Demand components and Inflation in Egypt?

Unconventional monetary policy and policy foresight

What are the effects of unconventional monetary policy interventions on the economy? Empirical studies utilizing traditional SVAR models consistently report expansionary effects on output and prices while considering only a small number of variables. This paper is the first to present both narrative and empirical evidence indicating that these models are susceptible to policy foresight, as central banks frequently announce their unconventional policies months in advance. To address policy foresight, we estimate a Bayesian FAVAR model with an extended set of information for the Euro Area. Consistent with the existing literature, we find that an unconventional monetary policy shock boosts economic activity by increasing industrial production and reducing the unemployment rate. Notably, our estimated effects are both larger and more persistent compared to previous findings. Furthermore, the shock decreases interest rates, interest rate spreads, and government bond yields, leading to an improvement in financial conditions. In a noteworthy departure from previous research, we find significant uncertainty regarding the impacts on consumer and producer prices, highlighting the need for further research.

The impact of US housing demand and supply shocks on the Australian economy: Analysis implementing a SVAR model

AbstractThis thesis develops an open economy structural vector autoregression model to determine how the Australian economy is affected by both a US housing demand shock and a US housing supply shock. Previous literature has either grouped Australia with other economies or has excluded Australia altogether. This leaves a significant literature gap in explaining how the Australian economy is solely impacted. The results of the model indicate both a US housing demand and a US housing supply shock significantly impact the Australian economy, with the most significant being the impact of a US house price shock upon Australian GDP which is large and persistent over time. The results contribute to the understanding of how Australian policymakers should incorporate the US housing market into policy decisions and central bank modelling.

Study on the Impact of GGDP on Carbon Peak Pathways in Beijing-Tianjin-Hebei Region

GGDP accounting, as a new green economy measurement system, can more accurately assess carbon emissions and change trends, and provide important support for the Beijing-Tianjin-Hebei region to achieve carbon peak and carbon neutrality. In this paper, the improved GGDP accounting system based on EAMFP was firstly selected according to the economic development characteristics of the Beijing-Tianjin-Hebei region, and the scale of carbon emissions and the GGDP of the Beijing-Tianjin-Hebei region from 2007 to 2021 were accounted for. The LMDI method was used to decompose the energy carbon emissions in the Beijing-Tianjin-Hebei region, and combined with the STIRPAT model to dynamically analyze the emission trend in 2022-2050, and the imbalance was found by the Mann-Kendall test. The results point out that enhanced emission reduction can enable Beijing and Tianjin to achieve carbon peak by 2030, while Hebei reaches the peak around 2040, but does not show a significant decline five years after the peak. The SVAR model confirms the correlation between GGDP and carbon emissions in the Beijing-Tianjin-Hebei region and the trend of the future impact. This paper suggests that the Beijing-Tianjin-Hebei region should learn from domestic and international experiences in carbon emission reduction and strengthen the communication and interoperability among the three regions. The Beijing-Tianjin-Hebei region has different status quo in terms of energy consumption and carbon emissions, and the policies implemented should be different.

Government Spending Between Active and Passive Monetary Policy: An Invariance Result

Abstract This paper develops a new approach to analyze the relationship between the government spending multiplier and monetary policy. We embed measures of monetary policy activism into a nonlinear SVAR model. Our model allows the central bank to adjust its monetary policy regime in response to the economic conditions that arise after government spending shocks. We find that, regardless of the monetary policy regime at the time of a spending shock, the central bank adjusts its regime quickly and responds actively towards inflation only a few quarters after the shock hits the economy. This rapid response of monetary policy leaves medium-run multipliers ultimately unaffected by whether the initial regime was active or passive. For both initial regimes, our five-year multiplier estimates lie between 1.2 and 1.5. An apparent exception to this result is the zero lower bound period between 2008Q4 and 2015Q4-during which monetary policy kept nominal interest rates at zero. Our multiplier point estimates for that era are consistently larger than unity.

Identifiability and estimation of possibly non-invertible SVARMA Models: The normalised canonical WHF parametrisation

This article focuses on the parametrisation, identifiability, and (quasi-) maximum likelihood (QML) estimation of possibly non-invertible structural vector autoregressive moving average (SVARMA) models. SVAR models are routinely adopted due to their well-known implementation strategy. However, for various economic and statistical reasons, multivariate SVARMA settings are often more suitable. These settings introduce complexity in the analysis, primarily due to the presence of the moving average (MA) polynomial. We propose a novel representation of the MA polynomial matrix using the Wiener–Hopf factorization (WHF). A significant advantage of the WHF is its ability to handle possible non-invertibility and thus models with informational asymmetry between economic agents and outside observers. Since solutions of Dynamic Stochastic General Equilibrium (DSGE) models often involve this informational asymmetry, SVARMA models in WHF parametrisation can be considered data-driven alternatives to DSGE models and used for their evaluation. Furthermore, we provide low-level conditions for the asymptotic normality of the (Q)ML estimator and analytic expressions for the score and information matrix. As application, we estimate the Blanchard and Quah model, and compare our results and implied impulse response function with the ones in the SVAR model by Blanchard and Quah and a non-invertible SVARMA model by Gouriéroux and co-authors. Importantly, we have implemented this novel method in a well-documented R-package, making it readily accessible for researchers and practitioners.

The Response of Macroeconomic Variables to Government Spending Shocks in the Sudanese Economy 1989-2019: Comparing the Structural Shocks (DSGE Approach) and Impulse Response (SVAR Model)

The importance that different (approaches and models) to modeling the macroeconomy place on theoretical coherence compared to their capacity to match the data and the quality of the econometric model description varies. Dynamic stochastic general equilibrium (DSGE) models are more theoretical, whereas vector autoregression (SVAR) models provide a better match to the data. For developed economies, there are well-established publications on measuring the response of economic indicators to government spending shocks and aggregate macroeconomic activity. In addition, such empirical studies in emerging nations are scarce. This research seeks to fill this void by utilizing the DSGE model and the SVAR approach to investigate the influence of the response of macroeconomic variables to government spending shocks in the Sudanese economy from 1989 to 2019. The findings indicate that the influence of government expenditure shocks on the Sudanese economy is inconsistent with Keynesian principles, as some selected macroeconomic indicators do not respond positively to government expenditure shocks. The non-responsiveness of the inflation rate and exchange rate to government expenditure shocks is demonstrated; this finding may indicate the monetary authority’s weakness in managing monetary variables in the Sudanese economy. In most situations, fiscal and monetary policies were in sync, and “double expansionary” and “double contractionary” policy coordination may be the proper approach; and also create tools that fit the Sudanese economy’s structure.

Inflation-targeting central bank responses to exchange rate shocks: evidence from Latin America

ABSTRACT This paper examines the impact of real exchange rate shocks on policy interest rates in the five major inflation-targeting economies in LATAM. Using a SVAR model with identification based on sign and short-run restrictions, we find that monetary policy reacts to real exchange rate shocks across all five countries. Specifically, interest rates rise directly in response to a positive real exchange rate shock (appreciation). A subsequent reversal occurs after a few quarters, with statistical significance observed in three countries. Additionally, shocks to the policy rate are demonstrated to effectively induce a real depreciation of the exchange rate.

The impact of monetary policy shocks — Do not rule out central bank information effects or economic news

This paper reassesses the impact of monetary policy and central bank information shocks while accounting for the influence of economic news. We regress a set of monetary policy surprises on a measure of economic news and incorporate these new instruments into an SVAR model. Furthermore, we distinguish between the two shocks via sign restrictions on the instruments’ impulse response functions. Our findings indicate significantly stronger and more enduring economic effects for monetary policy shocks, while the economic effects of central bank information shocks are weaker, if not vanish entirely. Nevertheless, persistent financial effects prevent us from completely dismissing the existence of central bank information effects. Consequently, it is important to account for both the effects of central bank information shocks and economic news in monetary policy settings.