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International transmission of shocks: a time-varying factor-augmented VAR approach to the open economy

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Author Info

  • Liu, Philip

    ()
    (International Monetary Fund)

  • Mumtaz, Haroon

    ()
    (Bank of England)

  • Theophilopoulou, Angeliki

    ()
    (University of Westminister)

Abstract

A growing literature has documented changes to the dynamics of key macroeconomic variables in industrialised countries and highlighted the possibility that these variables may react differently to structural shocks over time. However, existing empirical work on the international transmission of shocks largely abstracts from the possibility of changes to the international transmission mechanism across time. In addition, the literature has largely employed small-scale models with limited number of variables. This paper introduces an empirical model which allows the estimation of time-varying response of a large set of domestic variables to foreign money supply, demand and supply shocks. The key results show that a foreign monetary policy tightening resembles the classic beggar-thy-neighbour scenario for the United Kingdom in the period 1975-90. In more recent periods, the response is negative but largely insignificant.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 425.

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Length: 44 pages
Date of creation: 27 May 2011
Date of revision:
Handle: RePEc:boe:boeewp:0425

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Keywords: Factor augmented VAR; Time-variation; Gibbs sampling.;

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References

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  1. Bianchi, Francesco & Mumtaz, Haroon & Surico, Paolo, 2009. "Dynamics of the term structure of UK interest rates," Bank of England working papers 363, Bank of England.
  2. Haroon Mumtaz & Özlem Oomen & Jian Wang, 2006. "Exchange rate pass-through into UK import prices," Bank of England working papers 312, Bank of England.
  3. Thomas Lubik & Frank Schorfheide, 2005. "A Bayesian Look at New Open Economy Macroeconomics," Economics Working Paper Archive 521, The Johns Hopkins University,Department of Economics.
  4. Juan F. Rubio-Ramirez & Daniel Waggoner & Tao Zha, 2006. "Markov-Switching Structural Vector Autoregressions: Theory and Application," Computing in Economics and Finance 2006 69, Society for Computational Economics.
  5. Marco Del Negro & Christopher Otrok, 2008. "Dynamic factor models with time-varying parameters: measuring changes in international business cycles," Staff Reports 326, Federal Reserve Bank of New York.
  6. Cushman, David O. & Zha, Tao, 1997. "Identifying monetary policy in a small open economy under flexible exchange rates," Journal of Monetary Economics, Elsevier, Elsevier, vol. 39(3), pages 433-448, August.
  7. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, Elsevier, vol. 74(1), pages 119-147, September.
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Citations

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Cited by:
  1. Eickmeier, Sandra & Lemke, Wolfgang & Marcellino, Massimiliano, 2011. "The Changing International Transmission of Financial Shocks: Evidence from a Classical Time-Varying FAVAR," CEPR Discussion Papers 8341, C.E.P.R. Discussion Papers.
  2. Eickmeier, Sandra & Lemke, Wolfgang & Marcellino, Massimiliano, 2011. "Classical time-varying FAVAR models - Estimation, forecasting and structural analysis," CEPR Discussion Papers 8321, C.E.P.R. Discussion Papers.
  3. Philip Liu & Haroon Mumtaz, 2011. "Evolving Macroeconomic Dynamics in a Small Open Economy: An Estimated Markov Switching DSGE Model for the UK," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 43(7), pages 1443-1474, October.
  4. Sandra Eickmeier, 2010. "Analyse der Uebertragung US-amerikanischer Schocks auf Deutschland auf Basis eines FAVAR," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 230(5), pages 571-600, October.

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