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How much does aggregate demand travel across the Atlantic?

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  • Van Robays, Ine
  • Stracca, Livio

Abstract

We identify the spill-over of demand shocks between the world's two largest advanced economies; the US and the euro area. We estimate a Bayesian VAR with sign restrictions, using standard restrictions for the domestic impact of the shock but a novel approach to identify the geographic location of the shocks and rule out common shocks. For the latter, we use the relative performance of small open economies that are neighbors of the US and the euro area, respectively Canada and Sweden, in addition to restricting the relative effects on the US, the euro area and the rest of the world. We find that demand spill-overs of US and euro area demand shocks become smaller on average when imposing relative restrictions, while they become larger in periods which are well-known to be specific to the US (global financial crisis) or the euro area (euro area sovereign debt crisis). Our results are confirmed by running a ‘placebo test’ where we replace the euro area with a small euro area economy, which should not have an independent effect on the US economy due to its small size. JEL Classification: C5, F41, F44

Suggested Citation

  • Van Robays, Ine & Stracca, Livio, 2020. "How much does aggregate demand travel across the Atlantic?," Working Paper Series 2430, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20202430
    Note: 335958
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Bayesian VAR; international spillovers; open economy; sign restrictions.;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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