Macroeconomic policy coordination in the global economy: VAR and BVAR-DSGE analyses

Impulse response and variance decomposition estimations are similar in traditional VAR (1) and BVAR-DSGE models but the later model can provide theoretical and structural reasons behind those estimations. In the context of growth competition and spill over effects of policies, it is important to quantify such positive or complementary from negative or competitive impacts so that appropriate actions could be taken for policy coordination. Cooperative mechanism should be structured based on these analysis and evaluation of likely scenarios in coming years. Analysis of business cycle results from the VAR and BVAR-DSGE models illustrate the degree of interactions and interdependence in the global economy in the short to medium runs. Impulse response and variance decomposition estimations are similar in traditional VAR (1) and BVAR-DSGE models but the later model can provide theoretical and structural reasons behind those estimations. In the context of growth competition and spill over effects of policies, it is important to quantify such positive or complementary impacts from negative or competitive impacts so that appropriate actions could be taken for policy coordination. Cooperative mechanism should be structured based on these analysis and evaluation of likely scenarios in coming years. First two models in this paper illustrated how interactions and interdependence could be studied using VAR and BVAR-DSGE models of India and the US. Then strategic macroeconomic policy coordination and interdependence were studied strategically with VAR models of China, India, Germany, UK and the US estimated using the quarterly time series of growth rates. Persistency and conditional dependencies are observed and fluctuations around the average growth rates are compared across countries. Estimates show that there is a considerable growth competition among these countries. India's growth is influenced much by its fundamentals but slows down a bit when China, Germany, UK or US grow. In contrast China is able to absorb foreign growth to its benefit except that it competes with Germany. Germany's growth is more determined by its fundamentals and that of the US. Higher growth rates in other countries seem to lower it. Growth rate in the UK are positively related to the growth of Germany, UK and US but not related to that of India and China. The US growth rate are positively linked to that of India, the UK and the US growth itself.