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

  • Liu, Philip


    (International Monetary Fund)

  • Mumtaz, Haroon


    (Bank of England)

  • Theophilopoulou, Angeliki


    (University of Westminister)

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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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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  1. Francesco Bianchi & Haroon Mumtaz, 2010. "Dynamics of the Term Structure of UK Interest Rates," Working Papers 10-38, Duke University, Department of Economics.
  2. Juan Francisco Rubio-Ramírez & Daniel F. Waggoner & Tao Zha, 2005. "Markov-switching structural vector autoregressions: theory and application," FRB Atlanta Working Paper 2005-27, Federal Reserve Bank of Atlanta.
  3. Haroon Mumtaz & Özlem Oomen & Jian Wang, 2006. "Exchange rate pass-through into UK import prices," Bank of England working papers 312, Bank of England.
  4. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
  5. 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.
  6. 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.
  7. David O. Cushman & Tao Zha, 1995. "Identifying monetary policy in a small open economy under flexible exchange rates," FRB Atlanta Working Paper 95-7, Federal Reserve Bank of Atlanta.
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