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The GVAR approach and the dominance of the U.S. economy

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  • Alexander Chudik
  • Vanessa Smith

Abstract

This paper extends the recent literature about global macroeconomic modelling by allowing the presence of a globally dominant economy. Our contribution is both theoretical and empirical. From a theoretical standpoint, we follow Chudik and Pesaran (2011 and 2012) to derive the GVAR approach as an approximation to two Infinite-Dimensional VAR (IVAR) models featuring nonstationary variables: one corresponding to the world consisting of several small open economies (benchmark model), and one corresponding to the world featuring a dominant economy (extended model). ; It is established that in the presence of a dominant economy, restrictions implied by the asymptotic analysis of a system without a dominant economy are no longer valid. The theoretical framework is then brought to the data by estimating both versions of the GVAR model featuring 33 countries for the period 1979(Q2)–2003(Q4). We found some support for the extended version of the GVAR model, allowing the US to be the dominant player in the world economy.

Suggested Citation

  • Alexander Chudik & Vanessa Smith, 2013. "The GVAR approach and the dominance of the U.S. economy," Globalization and Monetary Policy Institute Working Paper 136, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddgw:136
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    File URL: http://www.dallasfed.org/assets/documents/institute/wpapers/2013/0136.pdf
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    References listed on IDEAS

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    Cited by:

    1. Georgiadis, Georgios, 2016. "Determinants of global spillovers from US monetary policy," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 41-61.
    2. Cashin, Paul & Mohaddes, Kamiar & Raissi, Maziar & Raissi, Mehdi, 2014. "The differential effects of oil demand and supply shocks on the global economy," Energy Economics, Elsevier, vol. 44(C), pages 113-134.
    3. Konstantakis, Konstantinos N. & Michaelides, Panayotis G. & Tsionas, Efthymios G. & Minou, Chrysanthi, 2015. "System estimation of GVAR with two dominants and network theory: Evidence for BRICs," Economic Modelling, Elsevier, vol. 51(C), pages 604-616.
    4. Georgiadis, Georgios, 2015. "Examining asymmetries in the transmission of monetary policy in the euro area: Evidence from a mixed cross-section global VAR model," European Economic Review, Elsevier, vol. 75(C), pages 195-215.
    5. Marçal, Emerson Fernandes & Zimmermann, Beatrice Aline & Mendonça, Diogo de Prince & Giovanni, Merlin & Simões, Oscar Rodrigues, 2016. "Assessing global economic activity linkages: an empirical exercise based on global autoregressive regression," Textos para discussão 416, FGV/EESP - Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).

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