Time-varying Structural Vector Autoregression Model Research Articles

Impacts of RMB devaluation on China’s trade balances: a time-varying SVAR approach

ABSTRACT In this article, I empirically examine time-varying effects of real renminbi (RMB) devaluation on China’s trade balances. To this end, I estimate a time-varying structural vector autoregression model with monthly data. Results demonstrated that effects of real RMB devaluation on China’s trade balances are time varying. In a few months after devaluation of RMB, trade balances worsen as predicted in J-curve theory in most sample periods. However, subsequent improvements of trade balances predicted in J-curve theory appear only in certain periods, particularly in 2000s. Finally, devaluation of RMB positively affects China’s GDP and OECD industrial production, although the size of effects varies across sample periods. Joining WTO, the global financial crisis and endogenous feedbacks induced by price effects seem to be important to understand these time-varying patterns.

Brexit associated sharp depreciation and implications for UK’s inflation and balance of payments

PurposeThe purpose of this paper is to analyse the implications of exchange rate depreciation for inflation targeting and trade balance of UK in the context of the Brexit epoch.Design/methodology/approachThe study employed a time-varying structural vector auto-regression (TVSVAR) model framework in which the sources of time variation were both the coefficients and variance-covariance matrix of the innovations on the data from January 1989 to September 2016.FindingsThe findings suggest that the depreciation of the Stirling has significant effects on inflation and trade balance in UK in context of Brexit epoch. It also showed that such a depreciation can be helpful in the improvement of external balance as well as steering the inflation to its statutory target. Despite, the inflation targeting, there is strong evidence of a pass-through.Research limitations/implicationsResearch has profound implications in terms of the sharp depreciation of GBP associated with the Brexit outcome. The study is very topical and could be very interesting to the readership of JES as well as wider audience. The study has limitations in a context that the significance of the results and association of the under analysis entities is contingent on the future trade relationships and Channel between UK and EU. Therefore, although there is a lot of uncertainty about the future of Britain trade relationships, this study provides guidance on the importance of exchange rate channel if the similar trade arrangements prevails in the post-Brexit era.Practical implicationsThe research has profound practical implications, using a TVSVAR model in which the relationship among the entities varies over time; it has shown the importance of exchange rate in terms of external balance and inflation targeting. Hence, it has appeal for the practitioners as well as academics.Social implicationsThe research has great social implications. The Brexit is the biggest political and economic event of this era for UK and EU. There are big questions about the relationship between UK and EU in the post-Brexit epoch as well as questions about the future of the European integration. In this context, this study has shown that how the exchange rate could play an important role for the UK economy when its contemporary trade channels prevail. Concomitantly, it has social implications particularly for the European society.Originality/valueThe research is an original piece of work. It has contributed to the debate on the exchange rate deprecation, external balance and inflation targeting in context of the Brexit associated sharp depreciation of Stirling. It has used a framework, i.e. TVSVAR, which also have unique features in terms of testing the associations among under analysis entities against time.

Does Nuclear Uncertainty Threaten Financial Markets?: The Attention Paid to North Korean Nuclear Threats and its Impact on South Korea's Financial Markets

We explore how investor attention paid to dangerous nuclear tests in an adjacent country influences financial market outcomes. To measure the attention paid to North Korean nuclear threats, we introduce a weekly Google search volume index for keywords on North Korean nuclear events. Using a time-varying structural vector auto-regression model with block exogeneity restrictions, we find that investor attention paid to nuclear threats has heterogeneous effects on South Korea’s stock price across industries and over time: attention on only the first nuclear test was negatively related to stock price index, which vanished thereafter. Moreover, the investor attention paid to the nuclear risk reduced stock prices, especially in the banking industry, during the entire sample period.

Brexit Associated Sharp Depreciation and Implications for UK's Inflation and Balance of Payments

Purpose: The purpose of this paper is to analyse the implications of exchange rate depreciation for inflation targeting and trade balance of UK in the context of the Brexit epoch. Design/methodology/approach: The study employed a time-varying structural vector auto-regression (TVSVAR) model framework in which the sources of time variation were both the coefficients and variance-covariance matrix of the innovations on the data from January 1989 to September 2016. Findings: The findings suggest that the depreciation of the Stirling has significant effects on inflation and trade balance in UK in context of Brexit epoch. It also showed that such a depreciation can be helpful in the improvement of external balance as well as steering the inflation to its statutory target. Despite, the inflation targeting, there is strong evidence of a pass-through. Research limitations/implications: Research has profound implications in terms of the sharp depreciation of GBP associated with the Brexit outcome. The study is very topical and could be very interesting to the readership of JES as well as wider audience. The study has limitations in a context that the significance of the results and association of the under analysis entities is contingent on the future trade relationships and Channel between UK and EU. Therefore, although there is a lot of uncertainty about the future of Britain trade relationships, this study provides guidance on the importance of exchange rate channel if the similar trade arrangements prevails in the post-Brexit era. Practical implications: The research has profound practical implications, using a TVSVAR model in which the relationship among the entities varies over time; it has shown the importance of exchange rate in terms of external balance and inflation targeting. Hence, it has appeal for the practitioners as well as academics. Social implications: The research has great social implications. The Brexit is the biggest political and economic event of this era for UK and EU. There are big questions about the relationship between UK and EU in the post-Brexit epoch as well as questions about the future of the European integration. In this context, this study has shown that how the exchange rate could play an important role for the UK economy when its contemporary trade channels prevail. Concomitantly, it has social implications particularly for the European society. Originality/value: The research is an original piece of work. It has contributed to the debate on the exchange rate deprecation, external balance and inflation targeting in context of the Brexit associated sharp depreciation of Stirling. It has used a framework, i.e. TVSVAR, which also have unique features in terms of testing the associations among under analysis entities against time.

Time-varying price shock transmission and volatility spillover in foreign exchange, bond, equity, and commodity markets: Evidence from the United States

We study the cross-market financial shocks transmission mechanism on the foreign exchange, equity, bond, and commodity markets in the United States using a time-varying structural vector autoregression model with stochastic volatility (TV-SVAR-SV). The price shocks are absorbed immediately in two or three days, suggesting that all markets are quite efficient. A slight mean reversion and an overshooting behavior are observed. Considering the volatility spillover effect, we highlight two properties of volatility shocks. First, the effects of the volatility shocks are released gradually. Reaching peak volatility spillover levels would require five to ten days. Second, the dynamics of volatility spillovers vary tremendously over time. Different types of markets respond to certain, but not all, extreme events. Our findings suggest the need to conduct investor monitoring of current events instead of using technical analysis based on historical data. Investors should also diversify their portfolios using assets that can respond to different and extreme shocks.

Time-Varying Structural Vector Autoregressions and Monetary Policy: A Corrigendum

This note corrects a mistake in the estimation algorithm of the time-varying structural vector autoregression model of Primiceri (2005) and proposes a new algorithm that correctly applies the procedure proposed by Kim, Shephard, and Chib (1998) to the estimation of VAR or DSGE models with stochastic volatility. Relative to Primiceri (2005), the correct algorithm involves a different ordering of the various Markov Chain Monte Carlo steps.