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

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  • Knut Are Aastveit

    ()

  • Hilde C. Bjørnland

    ()

  • Leif Anders Thorsrud

    ()

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 Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School in its series Working Papers with number 0005.

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Length: 59 pages
Date of creation: Nov 2011
Date of revision:
Handle: RePEc:bny:wpaper:0005

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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. Breitung, Jörg & Eickmeier, Sandra, 2014. "Analyzing business and financial cycles using multi-level factor models," Discussion Papers 11/2014, Deutsche Bundesbank, Research Centre.
  2. Knut Are Aastveit & Hilde C. Bjørnland & Leif Anders Thorsrud, 2012. "What drives oil prices? Emerging versus developed economies," Working Papers 0007, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
  3. Hilde C. Bjørnland & Leif Anders Thorsrud, 2013. "Boom or gloom? Examining the Dutch disease in a two-speed economy," Working Papers 0015, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
  4. Leif Anders Thorsrud, 2013. "Global and regional business cycles. Shocks and propagations," Working Paper 2013/08, Norges Bank.
  5. 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.

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