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The world is not enough! Small open economies and regional dependence

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Author Info

  • Knut Are Aastveit

    ()
    (Norges Bank (Central Bank of Norway))

  • Hilde C. Bjørnland

    ()
    (BI Norwegian Business School, University of California and Norges Bank (Central Bank of Norway))

  • Leif Anders Thorsrud

    ()
    (BI Norwegian Business School and Norges Bank (Central Bank of Norway))

Abstract

This paper bridges the new open economy factor augmented VAR (FAVAR) studies with the recent findings in the business cycle synchronization literature emphasizing the importance of regional factors. That is, we estimate and identify a three block FAVAR model with separate world, regional and domestic blocks and study the transmission of both global and regional shocks to four small open economies (Canada, New Zealand, Norway and UK). The results show that foreign shocks explain a major share of the variance in all countries, most so shocks that are common to the world. However, regional shocks also play an important role, explaining more than 20 percent of the variance in the variables. Hence in small open economies, the world is not enough. The regional factors impact the four countries differently, though, some through trade and some through consumer sentiment. Our findings of a strong transmission of both global and regional shocks to open economies are in sharp contrast to the evidence from recently developed open economy DSGE models.

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Bibliographic Info

Paper provided by Norges Bank in its series Working Paper with number 2011/16.

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Length: 57 pages
Date of creation: 01 Dec 2011
Date of revision:
Handle: RePEc:bno:worpap:2011_16

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Keywords: International transmission; World and region; Small open economy; FAVAR; Business cycles;

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Citations

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Cited by:
  1. Knut Are Aastveit & Hilde C. Bjoernland, 2013. "What drives oil prices? Emerging versus developed economies," CAMA Working Papers 2013-11, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Leif Anders Thorsrud, 2013. "Global and regional business cycles. Shocks and propagations," Working Paper 2013/08, Norges Bank.
  3. Svatopluk Kapounek & Jitka Pomenkova, 2012. "Spurious synchronization of business cycles: Dynamic correlation analysis of V4 countries," MENDELU Working Papers in Business and Economics 2012-22, Mendel University in Brno, Faculty of Business and Economics.
  4. Hilde C. Bjørnland & Leif Anders Thorsrud, 2013. "Boom or gloom? Examining the Dutch disease in a two-speed economy," CAMA Working Papers 2013-76, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  5. Jörg Breitung & Sandra Eickmeier, 2014. "Analyzing business and financial cycles using multi-level factor models," CAMA Working Papers 2014-43, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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