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

  • Alexander Chudik
  • Vanessa Smith

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of a dominant economy, restrictions implied by the asymptotic analysis of a system without a dominant economy are no longer valid.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.

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Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 136.

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Date of creation: 2013
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Handle: RePEc:fip:feddgw:136
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  1. Chudik, Alexander & Pesaran, Hashem & Tosetti, Elisa, 2009. "Weak and strong cross section dependence and estimation of large panels," Working Paper Series 1100, European Central Bank.
  2. Tamim Bayoumi & Hamid Faruqee & Douglas Laxton & Philippe D Karam & Alessandro Rebucci & Jaewoo Lee & Ben Hunt & Ivan Tchakarov, 2004. "GEM; A New International Macroeconomic Model," IMF Occasional Papers 239, International Monetary Fund.
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  6. Stephane Dees & Filippo di Mauro & M. Hashem Pesaran & L. Vanessa Smith, 2004. "Exploring the International Linkages of the Euro Area: A Global VAR Analysis," IEPR Working Papers 04.6, Institute of Economic Policy Research (IEPR).
  7. Binder, M. & Pesaran, H., 1996. "Multivariate Linear Rational Expectations Models: Characterisation of the Nature of the Solutions and Their Fully Recursive Computation," Cambridge Working Papers in Economics 9619, Faculty of Economics, University of Cambridge.
  8. Pesaran, M.H. & Schuermann, T. & Treutler, B-J. & Weiner, S.M., 2003. "Macroeconomic Dynamics and Credit Risk: A Global Perspective," Cambridge Working Papers in Economics 0330, Faculty of Economics, University of Cambridge.
  9. Adolfson, Malin & Laseen, Stefan & Linde, Jesper & Villani, Mattias, 2007. "Bayesian estimation of an open economy DSGE model with incomplete pass-through," Journal of International Economics, Elsevier, vol. 72(2), pages 481-511, July.
  10. M. Hashem Pesaran, 2007. "A simple panel unit root test in the presence of cross-section dependence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 265-312.
  11. Binder, M. & Hsaio, C. & Pesaran, M.H., 2000. "Estimation and Inference in Short Panel Vector Autoregressions with Unit Roots and Cointegration," Cambridge Working Papers in Economics 0003, Faculty of Economics, University of Cambridge.
  12. Pesaran, M.H. & Shin, Y., 1993. "Cointegration and Speed of Convergence to Equilibrium," Cambridge Working Papers in Economics 9311, Faculty of Economics, University of Cambridge.
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  14. Bussière, Matthieu & Ca' Zorzi, Michele & Chudik, Alexander & Dieppe, Alistair, 2010. "Methodological advances in the assessment of equilibrium exchange rates," Working Paper Series 1151, European Central Bank.
  15. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  16. Garratt, Anthony & Lee, Kevin & Pesaran, M. Hashem & Shin, Yongcheol, 2006. "Global and National Macroeconometric Modelling: A Long-Run Structural Approach," OUP Catalogue, Oxford University Press, number 9780199296859.
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  20. M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, vol. 74(4), pages 967-1012, 07.
  21. M. Hashem Pesaran & L. Vanessa Smith & Ron P. Smith, 2007. "What if the UK or Sweden had joined the euro in 1999? An empirical evaluation using a Global VAR," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(1), pages 55-87.
  22. 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.
  23. M. Hashem Pesaran & Til Schuermann & Scott M. Weiner, 2002. "Modeling Regional Interdependencies Using a Global Error-Correcting Macroeconometric Model," Center for Financial Institutions Working Papers 01-38, Wharton School Center for Financial Institutions, University of Pennsylvania.
  24. Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers 1015, Cowles Foundation for Research in Economics, Yale University.
  25. Peter Reinhard Hansen, 2005. "Granger's representation theorem: A closed-form expression for I(1) processes," Econometrics Journal, Royal Economic Society, vol. 8(1), pages 23-38, 03.
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