Modeling MENA economies using a GVAR approach: Domestic, regional and international factors

This article seeks to assess the relative contribution of regional, domestic, and international factors in explaining fluctuations in output and inflation in MENA countries. Adopting a GVAR approach, we estimate a model that combines country/region-specific vector error correction models in which domestic variables are linked to country-specific foreign variables. A global framework is designed to evaluate the importance of different shocks and transmission channels of business cycles at the global level. The model is estimated for 16 countries, including 8 countries grouped into a single economy (the Eurozone), the USA, China, and 6 MENA countries, over the period 2000-2022. Using a forecast error variance decomposition exercise, the sources of disturbances are identified according to their geographic origin. Evidence suggests that regional factors do not appear to contribute in any way to explain the variability of output and inflation in the MENA countries. The dynamics of MENA countries is far from depending on intra-regional interdependencies which do not support the existence of a common regional component in the business dynamics of MENA region. Rather, both domestic and external shocks (originating from industrial countries) account for the main share of output and inflation fluctuations. For countries such as Tunisia and Morocco, it’s the Euro Area that appears to play a relatively more important role than the US and China. In contrast, the results are reversed for Middle Eastern countries, where the influence of the US and China is significantly greater compared to that of the Euro Area. We also observe that, for the Gulf countries, China plays a role almost as important as that of the US.