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Exploring the international linkages of the euro area: a global VAR analysis

Author

Listed:
  • Filippo di Mauro

    (European Central Bank, Frankfurt-am-Main, Germany)

  • L. Vanessa Smith

    (Cambridge Endowment for Research in Finance (CERF), Judge Business School, University of Cambridge, UK)

  • Stephane Dees

    (European Central Bank, Frankfurt-am-Main, Germany)

  • M. Hashem Pesaran

    (Faculty of Economics and Centre for International Macroeconomics and Finance (CIMF), University of Cambridge, UK, and USC)

Abstract

This paper presents a quarterly global model combining individual country vector error-correcting models in which the domestic variables are related to the country-specific foreign variables. The global VAR (GVAR) model is estimated for 26 countries, the euro area being treated as a single economy, over the period 1979-2003. It advances research in this area in a number of directions. In particular, it provides a theoretical framework where the GVAR is derived as an approximation to a global unobserved common factor model. Using average pair-wise cross-section error correlations, the GVAR approach is shown to be quite effective in dealing with the common factor interdependencies and international co-movements of business cycles. It develops a sieve bootstrap procedure for simulation of the GVAR as a whole, which is then used in testing the structural stability of the parameters, and for establishing bootstrap confidence bounds for the impulse responses. Finally, in addition to generalized impulse responses, the current paper considers the use of the GVAR for 'structural' impulse response analysis with focus on external shocks for the euro area economy, particularly in response to shocks to the US. Copyright © 2007 John Wiley & Sons, Ltd.

Suggested Citation

  • Filippo di Mauro & L. Vanessa Smith & Stephane Dees & M. Hashem Pesaran, 2007. "Exploring the international linkages of the euro area: a global VAR analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(1), pages 1-38.
  • Handle: RePEc:jae:japmet:v:22:y:2007:i:1:p:1-38
    DOI: 10.1002/jae.932
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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