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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.M. & Shin,Y., 1995. "Long-Run Structural Modelling," Cambridge Working Papers in Economics 9419, Faculty of Economics, University of Cambridge.
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  3. Todd E. Clark & Eric van Wincoop, 1999. "Borders and business cycles," Research Working Paper 99-07, Federal Reserve Bank of Kansas City.
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  9. de Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic Risk: A Survey," CEPR Discussion Papers 2634, C.E.P.R. Discussion Papers.
  10. 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.
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  12. Paul Krugman, 1992. "Geography and Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262610868, June.
  13. Garratt, Anthony & Kevin Lee & M Hashem Pesaran & Yongcheol Shin, 2002. "Forecast Uncertainties In Macroeconometric Modelling: An Application to the UK Economy," Royal Economic Society Annual Conference 2002 82, Royal Economic Society.
  14. A Garratt & K Lee & M Pesaran & Yongcheol Shin, 2004. "A long run structural macroeconometric model of the UK," ESE Discussion Papers 35, Edinburgh School of Economics, University of Edinburgh.
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  16. 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.
  17. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, March.
  18. Glick, Reuven & Rose, Andrew K, 1998. "Contagion and Trade: Why are Currency Crises Regional," CEPR Discussion Papers 1947, C.E.P.R. Discussion Papers.
  19. 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.
  20. 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.
  21. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
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  23. 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..
  24. Pesaran, M. H. & Smith, Ron P., 1998. "Structural Analysis of Cointegrating VARs," Cambridge Working Papers in Economics 9811, Faculty of Economics, University of Cambridge.
  25. 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.
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  28. 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.
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