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Modelling Regional Interdependencies Using a Global Error-Correcting Macroeconometric Model

  • Pesaran, M.H.
  • Weiner, S.M.

We build a compact global macroeconometric model capable of generating point and density forecasts for a core set of macroeconomic factors using recent advances in the analysis of cointegrating systems. We do so for a set of countries/regions and explicitly allow for interdependencies that exist between national and international factors. In an unrestricted VAR(p) model in k endogenous variables covering N countries, the number of unknown parameters will be unfeasibly large. We deal with this issue by first estimating individual country/region specific vector error-correcting models, where the domestic variables are related to corresponding foreign variables constructed to match the relevant international trade pattern. The country models are then combined to generate forecasts for all the variables in the world economy simultaneously. We estimate the model using quarterly data from 1979Q1 to 1999Q1, and investigate the time profile of the transmission of shocks of one variable to the rest of the world to show the degree of regional interdependencies.

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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/wp0119.pdf
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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0119.

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Length: 54
Date of creation: Dec 2001
Date of revision:
Handle: RePEc:cam:camdae:0119
Note: EM
Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

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  1. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January.
  2. Anil Bangia & Francis X. Diebold & Til Schuermann, 2000. "Ratings Migration and the Business Cycle, With Application to Credit Portfolio Stress Testing," Center for Financial Institutions Working Papers 00-26, Wharton School Center for Financial Institutions, University of Pennsylvania.
  3. Pesaran, M. H. & Shin, Y. & Smith, R. J., 1997. "Structural Analysis of Vector Error Correction Models with Exogenous I(1) Variables," Cambridge Working Papers in Economics 9706, Faculty of Economics, University of Cambridge.
  4. Garratt, Anthony & Lee, Kevin C & Pesaran, M. Hashem & Shin, Yongcheol, 1998. "A Structural Cointegrating VAR Approach to Macroeconometric Modelling," Cambridge Working Papers in Economics 9823, Faculty of Economics, University of Cambridge.
  5. De Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic risk: A survey," Working Paper Series 0035, European Central Bank.
  6. Carey, Mark, 2002. "A guide to choosing absolute bank capital requirements," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 929-951, May.
  7. Mohammad Hashem Pesaran & Yongcheol Shin, 1999. "Long-Run Structural Modelling," ESE Discussion Papers 44, Edinburgh School of Economics, University of Edinburgh.
  8. Masahisa Fujita & Paul Krugman & Anthony J. Venables, 2001. "The Spatial Economy: Cities, Regions, and International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262561476, June.
  9. M. Hashem Pesaran, 2000. "Forecast Uncertainties in Macroeconometric Modelling: An Application to the UK Economy," CESifo Working Paper Series 345, CESifo Group Munich.
  10. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
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  12. Todd E. Clark & Eric van Wincoop, 1999. "Borders and business cycles," Research Working Paper 99-07, Federal Reserve Bank of Kansas City.
  13. Olivier Jean Blanchard & Lawrence F. Katz, 1992. "Regional Evolutions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1), pages 1-76.
  14. William J. Crowder & Dennis L. Hoffman & Robert H. Rasche, 1999. "Identification, Long-Run Relations, and Fundamental Innovations in a Simple Cointegrated System," The Review of Economics and Statistics, MIT Press, vol. 81(1), pages 109-121, February.
  15. Nickell, Pamela & Perraudin, William & Varotto, Simone, 2000. "Stability of rating transitions," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 203-227, January.
  16. Mellander, Erik & Vredin, A & Warne, A, 1992. "Stochastic Trends and Economic Fluctuations in a Small Open Economy," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(4), pages 369-94, Oct.-Dec..
  17. Glick, Reuven & Rose, Andrew K., 1999. "Contagion and trade: Why are currency crises regional?," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 603-617, August.
  18. Leybourne, S J, 1995. "Testing for Unit Roots Using Forward and Reverse Dickey-Fuller Regressions," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 57(4), pages 559-71, November.
  19. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  20. Anthony Garratt & Kevin Lee & Mohammad Hashem Pesaran & Yongcheol Shin, 2001. "A long run structural macroeconometric model of the UK," ESE Discussion Papers 35, Edinburgh School of Economics, University of Edinburgh.
  21. Mark Carey, 2002. "A guide to choosing absolute bank capital requirements," International Finance Discussion Papers 726, Board of Governors of the Federal Reserve System (U.S.).
  22. Lando, David & Skodeberg, Torben M., 2002. "Analyzing rating transitions and rating drift with continuous observations," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 423-444, March.
  23. M. Hashem Pesaran & Ron P. Smith, 1998. "Structural Analysis of Cointegrating VARs," Journal of Economic Surveys, Wiley Blackwell, vol. 12(5), pages 471-505, December.
  24. David Rae & David Turner, 2001. "A Small Global Forecasting Model," OECD Economics Department Working Papers 286, OECD Publishing.
  25. 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.
  26. Gordy, Michael B., 2000. "A comparative anatomy of credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 119-149, January.
  27. Harbo, Ingrid, et al, 1998. "Asymptotic Inference on Cointegrating Rank in Partial Systems," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 388-99, October.
  28. Paul Krugman, 1992. "Geography and Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262610868, June.
  29. Richard Voith, 1994. "Do suburbs need cities?," Working Papers 93-27/R, Federal Reserve Bank of Philadelphia.
  30. Pesaran, M. H. & Smith, Ron P., 1998. "Structural Analysis of Cointegrating VARs," Cambridge Working Papers in Economics 9811, Faculty of Economics, University of Cambridge.
  31. Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 313-28, August.
  32. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, March.
  33. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  34. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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