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How the global perspective can help us identify structural shocks

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  • Alexander Chudik
  • Michael Fidora

Abstract

This paper argues that global perspective can help us with the identification of structural shocks by utilizing the information on the signs of the responses of individual countries (cross section units). We demonstrate the main idea by means of Monte Carlo experiments and present an empirical application where we look at the effects of oil supply shocks on output and on global exchange rate constellation. Using a large-scale GVAR model of oil prices and the global economy, we find supply shocks tend to have a stronger impact on emerging economies' real output as compared with mature economies, have a negative impact on real growth in oil-exporting economies as well, and tend to cause an appreciation (depreciation) of oil exporters' (oil importers') real exchange rates but also lead to an appreciation of the U.S. dollar. This paper also illustrates some pitfalls with the existing measures to summarize the available information on structural shocks identified using sign restrictions when the dimension of the model is large (as it is in the case of global models).

Suggested Citation

  • Alexander Chudik & Michael Fidora, 2012. "How the global perspective can help us identify structural shocks," Staff Papers, Federal Reserve Bank of Dallas, issue Dec.
  • Handle: RePEc:fip:feddst:y:2012:i:dec:n:19
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    File URL: http://www.dallasfed.org/assets/documents/research/staff/staff1204.pdf
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    References listed on IDEAS

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    1. Fabio Canova & Joaquim Pires Pina, 1998. "Monetary policy misspecification in VAR models," Economics Working Papers 420, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 1999.
    2. Bussière, Matthieu & Chudik, Alexander & Sestieri, Giulia, 2009. "Modelling global trade flows: results from a GVAR model," Working Paper Series 1087, European Central Bank.
    3. Fidora, Michael & Chudik, Alexander, 2011. "Using the global dimension to identify shocks with sign restrictions," Working Paper Series 1318, European Central Bank.
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    Cited by:

    1. Mohaddes, Kamiar & Pesaran, M. Hashem, 2017. "Oil prices and the global economy: Is it different this time around?," Energy Economics, Elsevier, vol. 65(C), pages 315-325.
    2. Mohaddes, Kamiar & Pesaran, M. Hashem, 2016. "Country-specific oil supply shocks and the global economy: A counterfactual analysis," Energy Economics, Elsevier, vol. 59(C), pages 382-399.

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