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Exploring the International Linkages of the Euro Area: a Global VAR Analysis

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Author Info
Dees, S.
di Mauro, F.
Pesaran, M.H.
Smith, L.V.

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Abstract

We presents a global model linking individual country vector error-correcting models in which domestic variables are related to country-specific variables as an approximate solution to a global common factor model. The model is estimated for 26 economies. It provides a theoretical framework where the GVAR is derived as an approximation to a global unobserved common factor model, and using average pair-wise cross-section error correlations, the approach is shown to be quite effective in dealing with common factor interdependencies and international co-movements of business cycles. In addition to generalised impulse response functions, we propose an identification scheme to derive structural impulse responses. We focus on identification of shocks to the US economy, particularly the monetary policy shocks, and consider the time profiles of their effects on the euro area. To this end we include the US model as the first country model and consider alternative orderings of the US variables.

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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0518.

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Length: 77
Date of creation: May 2005
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Handle: RePEc:cam:camdae:0518

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Related research
Keywords: Global VAR (GVAR); Global interdependencies; global macroeconomic modeling; impulse responses.;

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation
F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation

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